Estate Tax Portability and the DSUE Election: Why Even Small Estates Should File Form 706

Your father dies in 2024 in San Jose with a $4 million estate. Everything passes to your mother. No federal estate tax is due because the estate is well under the $13.61 million per-person exemption. A skipped Form 706 in this scenario routinely costs Bay Area families $2 million in avoidable federal estate tax down the road. The advisor says no filing is needed. The funeral ends, the estate paperwork closes, and nine months later the family moves on.

Five years later, your mother inherits $15 million from her own parents. Now her estate is worth $19 million. When she dies, her exemption is only $13.61 million. The IRS bills the family roughly $2 million in federal estate tax on the excess, taxed at 40%.

That tax was avoidable. Your father had roughly $10 million of unused exemption at his death. If your mother had filed Form 706 and made the DSUE portability election, she would have inherited that $10 million and her exemption at her own death would have been closer to $24 million. The tax bill would have been zero.

This is the single most common, single most expensive estate-tax filing mistake we see. The fix is a one-time return that costs a fraction of what it saves. This guide walks through how portability works, the 5-year window the IRS opened up in Rev. Proc. 2022-32, the worked math on a typical Bay Area family, and the mistakes that make the election fail.

One scope note: SVT prepares Form 706 and fiduciary returns. Your estate planning attorney drafts the wills, trusts, and powers of attorney. We file the return that locks in the DSUE election on top of whatever the attorney structured. The two roles work together, but they are separate.

The Setup: Federal Estate and Gift Exemption in 2026

The federal estate and gift tax uses a single lifetime exemption. For decedents dying in 2025 it was $13.99 million per person (per Rev. Proc. 2024-40); OBBBA reset it to a flat $15 million per person for 2026 under IRC 2010(c)(3)(A), with indexing resuming in 2027. For a married couple, the combined federal exemption for 2026 is up to $30 million. Anything above that gets taxed at 40%.

Without portability, the structure of the exemption creates a use-it-or-lose-it problem. Each spouse has their own $15 million bucket. If spouse A dies and uses only $5 million of their bucket (because most of their estate passed to spouse B under the unlimited marital deduction), the other $10 million is forfeited. Spouse B is left with only their own $15 million on their later death.

Portability fixes this. Through the DSUE (Deceased Spousal Unused Exclusion) election under IRC Section 2010(c), the surviving spouse can effectively transfer the unused portion of the first spouse's exemption to themselves. Total available exemption at the second death: up to $30 million combined.

Before portability was made permanent in 2013, couples had to use trust structures (credit shelter trusts, AB trusts, bypass trusts) to lock in both exemptions. Those structures still have valid uses, especially in second-marriage situations and for state estate tax planning. But for federal-only planning, portability is now the default tool and is dramatically simpler.

What the DSUE Election Actually Does

The DSUE is the deceased spouse's unused exclusion amount. Mechanically, IRC 2010(c)(2)(B) defines it as the lesser of (a) the basic exclusion amount for the year of death, or (b) the excess of the deceased spouse's applicable exclusion over the taxable estate plus adjusted taxable gifts.

In plain English: take the deceased spouse's $15 million exemption, subtract everything they used during life (taxable gifts) or at death (taxable estate), and the leftover is the DSUE. That leftover transfers to the surviving spouse on top of the survivor's own exemption.

The combined available exemption for the surviving spouse becomes:

• Survivor's own basic exclusion (currently $15 million for 2026 under IRC 2010(c)(3)(A); indexing resumes in 2027), PLUS
• DSUE inherited from the first deceased spouse

One critical detail: only the most recent deceased spouse's DSUE is usable. If a survivor remarries and the second spouse also predeceases them, the second spouse's DSUE replaces (rather than stacks on top of) the first spouse's DSUE. The first spouse's DSUE is gone the moment the surviving spouse remarries and that second spouse later dies. Sequencing matters in second-marriage planning.

Election Required: DSUE Is Not Automatic

This is where families lose the most money. The DSUE election is not automatic. To capture it, the surviving spouse (or the estate's executor) must affirmatively file Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, and check the box to elect portability of the DSUE.

Form 706 is a 30-plus page return. It requires a full inventory of the deceased's assets at date-of-death fair market value, including appraisals on real estate and closely-held business interests. It must be signed by the executor under penalty of perjury. Filing it is not trivial. But it is the only path to capturing the DSUE.

Without the election, the unused exemption is forfeited forever. There is no later "oh, we should have done that" remedy outside of the Rev. Proc. 2022-32 extension or a Private Letter Ruling (which costs $10,000 plus and can take 6 to 18 months).

The election is made on Part 6 of Form 706. There is also a way to opt out by checking a different box. Most estates that file should elect, and the default is to elect. The rare opt-out cases involve generation-skipping transfer (GST) planning where the executor wants to allocate exemption differently.

Form 706 Filing When the Estate Is Not Taxable

Form 706 is normally required only for taxable estates (those exceeding the $15 million threshold in 2026, or $5 million for decedents dying in 2017 or earlier with the threshold rising under TCJA). For estates below the threshold, no return is technically required.

But the DSUE election is only available through Form 706. So families whose estate is well under the threshold often still file a Form 706 with the sole purpose of preserving portability. This is called a DSUE-only filing or portability-only filing.

The IRS has specifically blessed simplified valuation reporting for these returns. For assets that pass to the surviving spouse and qualify for the marital deduction (or charity), the executor does not have to obtain qualified appraisals; reasonable date-of-death estimates are accepted. The return is still lengthy, but the appraisal cost is much lower than for a taxable estate.

The most common DSUE-only filing scenario: a married couple with $5 million to $13 million in combined assets where the first spouse to die holds the majority of the assets, everything passes outright (or via marital trust) to the survivor, no federal estate tax is due, but the survivor's family wants to lock in the deceased spouse's unused exemption against the chance the survivor's net worth grows (through inheritance, a business sale, real estate appreciation) before they die.

Rev. Proc. 2022-32: The 5-Year Filing Window

The standard Form 706 filing deadline is 9 months after the date of death, with one automatic 6-month extension available on Form 4768 (total: 15 months). Most families miss this deadline because no one tells them they need to file, especially in non-taxable estates where the advisor signaled "no return needed."

The IRS recognized the scope of the problem. Rev. Proc. 2022-32, issued July 2022, granted a sweeping extension: a surviving spouse (or executor) can file a DSUE-only Form 706 any time within 5 years of the date of death without needing a Private Letter Ruling. The relief is automatic if the filing meets the procedural requirements (Form 706, marked "FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER 2010(c)(5)(A)" at the top of the return).

This is massive penalty relief. Before Rev. Proc. 2022-32, missing the 9-month deadline meant a $10,000+ PLR fee and a multi-month review. Now, a family who finds out 4 years after dad's death that mom should have filed can quietly prepare and submit Form 706 with the magic language at the top, and the IRS will accept the late portability election.

Caveats: the relief applies only to portability-only returns. It does not extend the filing deadline for estates that owe estate tax. It does not waive the 9-month deadline for paying any tax that is due. And the 5-year window starts ticking from the date of death, not from when the family learns about it.

Worked Example: A Bay Area Family

Vikram is a senior engineer in Cupertino. His father, a longtime SVT client, dies in April 2024 with a $4 million estate (primarily a paid-off Saratoga house and a brokerage account). The will leaves everything to Vikram's mother. The estate planning attorney files the death certificate, retitles the assets, and tells the family "no estate tax return needed, you're well under the exemption."

That's true on the tax-due question. But the unused exemption is sitting on the table.

Father's exemption at death: $13.61 million (2024 amount). Used: roughly $0 (all assets passed to spouse via marital deduction). DSUE available: roughly $13.61 million.

Scenario A: Mother files Form 706 within the 9-month deadline (or by April 2029 under Rev. Proc. 2022-32) electing portability.

• Mother's exemption at her own future death: her own basic exclusion (let's say $15 million by then, after inflation) PLUS the $13.61 million DSUE = roughly $28.61 million.
• Mother later inherits $15 million from her own parents in 2027, bringing her net worth to $19 million.
• Mother dies in 2035 with an estate worth $20 million.
• Federal estate tax: $0. Her combined exemption fully covers the estate.

Scenario B: Mother does NOT file Form 706. DSUE forfeited.

• Mother's exemption at death: her own basic exclusion only, roughly $15 million in 2035.
• Mother dies with the same $20 million estate.
• Federal estate tax: 40% on the $5 million excess = $2,000,000 due.

Tax saved by filing: roughly $2 million. Cost of the Form 706 portability-only filing: a small fraction of that. The ROI on filing the return is not close.

What Goes Wrong Without a Form 706 Filing

The most common mistake we see at intake: a widow comes to us four years after her husband's death, having been told by the original attorney that "no return was needed" because the estate was non-taxable. Her own assets have since grown through inheritance or business sale. With Rev. Proc. 2022-32 still open, we file the DSUE-only return and capture up to $15 million of the husband's unused exemption. The cost of the filing is a fraction of what the eventual federal estate tax would have been on her later estate. After the five-year window closes, the only path is a Private Letter Ruling at $10,000+ in IRS fees plus 6 to 18 months of waiting.

The wrinkle that drove urgency before 2026 was the potential sunset of the TCJA-doubled exemption. The One Big Beautiful Bill Act of 2025 resolved that: it eliminated the sunset provision and reset the basic exclusion to a flat $15 million per individual for 2026 under IRC 2010(c)(3)(A), with indexing resuming in 2027. The DSUE captured in a prior year remains valuable regardless, because it adds to the survivor's own exclusion and any future growth in the survivor's estate will be measured against the combined amount. See our companion piece on SLATs and the lifetime exemption for planning strategies that remain relevant even after OBBBA permanence.

State Estate Tax: California Is Lucky, Other States Are Not

The federal estate tax is only half the picture. Many states impose their own estate taxes with much lower thresholds than the federal $15 million.

California has no state estate tax. California voters repealed the state's pickup tax in 1982 and have not reinstated one since. This is one of the most underappreciated tax advantages of being a California resident at death. Whether you have a $5 million estate or a $50 million estate, California takes nothing at the state level.

Other states are very different. Selected 2025 state estate tax thresholds (verify the current year before relying on any figure; most states index annually):

State	2025 Exemption	Top Rate	Portability?
Massachusetts	$2 million	16%	No
Oregon	$1 million	16%	No
Washington	$2.193 million	20%	No
New York	$7.16 million (cliff)	16%	No
Hawaii	$5.49 million	20%	Limited
California	No state estate tax	0%	N/A

Most states with estate taxes do not offer portability of their state-level exemption. A surviving spouse who moves from California to Washington or Oregon late in life loses the option to capture the deceased spouse's state-level exemption. For families with significant assets and an out-of-state retirement plan, the residency and trust structure decisions are real.

For the most part, our DSUE planning at SVT focuses on the federal portability election. If you own real property in a non-California estate-tax state (a vacation home on Cape Cod, a condo in Manhattan, a rental in Portland), the state-side analysis layers on top of the federal. We coordinate with your estate attorney on the trust structures that handle both.

Common DSUE Mistakes

1. Skipping the filing entirely. By far the most common error. The estate is non-taxable, so the family assumes no return is needed. The DSUE election is the reason to file anyway. If you are within 5 years of the first spouse's death and never filed Form 706, you almost certainly should under Rev. Proc. 2022-32.
2. Filing Form 706 but not checking the portability box. The election is made on Part 6 of the return. A return prepared by someone unfamiliar with portability may complete the asset inventory but miss the affirmative election. The DSUE is then lost even though a return was filed. Always confirm Part 6 is properly completed.
3. Valuation errors that freeze a wrong number. The DSUE amount is calculated based on the assets reported on Form 706. If assets are under-valued (or omitted), the DSUE is correspondingly larger; if over-valued, the DSUE is smaller. Once the IRS accepts the return and the survivor uses the DSUE on their own later return, the valuations from the first return generally cannot be re-opened to increase the DSUE. Get the appraisals right the first time.
4. Assuming portability replaces trust planning. For state estate tax planning, second marriages, asset protection, or generation-skipping planning, traditional credit shelter trusts (often called AB trusts or bypass trusts) still have a role. Portability is the right default for many couples; it is not the right answer for everyone.
5. Remarriage trap. Only the most recent deceased spouse's DSUE is usable. A widow who remarries and outlives her second husband loses the first husband's DSUE. If the first husband's DSUE was significant and the second husband's is small, this is a real economic loss. Talk through the implications before the second marriage if the numbers are material.
6. Missing the GST allocation. Form 706 is also where the executor allocates the deceased's GST exemption (a separate $15 million bucket for transfers that skip a generation). Portability does NOT cover GST exemption; the GST exemption is use-it-or-lose-it at the first death. For families with grandchildren beneficiaries, the GST allocation is its own planning lever.

Action Items for Surviving Spouses

• If your spouse died within the last 5 years and no Form 706 was filed, call us. Under Rev. Proc. 2022-32, you can still file a DSUE-only return and capture the election. The window is closing as time passes.
• If your spouse died more than 5 years ago, the standard remedy is gone, but a Private Letter Ruling is still possible. Cost is $10,000+ in IRS user fees plus professional fees, but for high-net-worth families the math often still works.
• Get a date-of-death valuation on every asset. Real estate appraisals, brokerage statements, business valuations. Even for a non-taxable estate, the valuations lock in the cost basis for the surviving spouse and the DSUE amount. See our piece on stepped-up basis under IRC 1014 for why this matters even when no return is filed.
• If you are planning a large lifetime gift before the survivor's own death, run the math first. Using up the DSUE on a gift versus saving it for the estate is a real planning decision. See our coverage of the annual gift tax exclusion and lifetime exemption for the gift side of the same exemption.
• Coordinate with your estate planning attorney. If you already have a trust (or if the attorney is recommending one), the portability election interacts with the trust funding. The two pieces should be designed together. Your attorney drafts the trust documents; SVT files the Form 706 that activates the portability on top.
• Don't assume "no tax due" means "no filing needed." For any married decedent with assets exceeding roughly half of the federal exemption, the portability filing should be on the table.

Frequently Asked Questions

Do I have to file Form 706 if my spouse's estate is under the $15 million exemption?

Form 706 is not technically required for estates under the federal exemption. However, the only way to elect DSUE portability and inherit the deceased spouse's unused exemption is to file Form 706 with the portability election checked on Part 6. Without the election, the unused exemption is forfeited forever. For most married couples with combined assets above roughly half of the federal exemption, filing a portability-only Form 706 is worth it.

What is the deadline to file Form 706 for the DSUE portability election?

The standard deadline is 9 months after the date of death, with a 6-month automatic extension available on Form 4768 (total 15 months). Rev. Proc. 2022-32 extends this deadline to 5 years from the date of death for portability-only filings, with no Private Letter Ruling required. After 5 years, the only remedy is a PLR, which costs at least $10,000 in IRS user fees plus professional fees.

What happens to the DSUE if I remarry?

Only the most recent deceased spouse's DSUE is usable. If you remarry and your second spouse later dies, the second spouse's DSUE replaces (not stacks with) the first spouse's. If the first spouse left a large DSUE and the second spouse has little or none, you lose the difference. This is worth considering before a remarriage where the numbers are material.

Does California impose its own estate tax on top of the federal?

No. California has no state estate tax. California voters repealed the state pickup tax in 1982 and have not reinstated one. Other states (Massachusetts, Oregon, Washington, New York, Hawaii) do impose state estate taxes with much lower thresholds. If you own property in one of those states, the state-side analysis layers on top of the federal portability planning.

How SVT Helps

SVT prepares Form 706 estate tax returns and Form 1041 fiduciary income tax returns. For the portability piece, our work includes:

• Reviewing the deceased's date-of-death asset inventory and confirming that a DSUE-only filing makes sense (the answer is usually yes for non-taxable estates)
• Preparing Form 706 with the portability election properly checked on Part 6
• Applying the simplified valuation rules for assets passing to the surviving spouse via marital deduction
• Filing under Rev. Proc. 2022-32 if the 9-month deadline has passed but the 5-year window is still open, with the proper magic language at the top of the return
• Coordinating with your estate planning attorney on the interplay between portability and any trust funding
• Modeling the future tax savings so the family can see what the filing is worth

We do not draft wills, trusts, powers of attorney, or other estate planning documents. That is your estate planning attorney's role. We are the tax-return side of the equation. If you do not have an estate attorney, we can refer you to several Bay Area firms we work with regularly.

See our overview of estate and trust tax services, our piece on whether you need a trust, and the planning context in our SLAT and lifetime exemption companion post.

Schedule a complimentary consultation and we will walk through your specific situation, whether the 5-year Rev. Proc. 2022-32 window is still open, and what filing the return would mean for your family's eventual estate tax exposure.