Announcement Results in Substantial Estate Tax Relief for Surviving Spouses

Key Takeaways

  • Transferring a decedent’s lifetime exclusion from the estate tax to a surviving spouse is a powerful tax-saving tool, but requires filing a Form 706 with a strict, often-missed deadline.
  • In July 2022, the IRS provided relief of up to five years from a decedent’s date of death to file the Form 706 and transfer the decedent’s lifetime exclusion.
  • Individuals who wonder how this rule may affect them or their estate planning should reach out to David Frederick, Senior Manager of Tax, at David.Frederick@LBMC.com.

The federal estate tax levies a tax against an estate on all assets a decedent owned or controlled at the time of his or her death. While this tax has broad reach, most estates do not pay it due to a large lifetime exclusion. That is, every individual has a lifetime exclusion that can shield a substantial value—currently $12.06 million—from estate tax liability. Moreover, if a decedent’s estate does not use all the decedent’s lifetime exclusion to shield assets from the estate tax, then any remaining lifetime exclusion can be transferred to the decedent’s surviving spouse to shield his or her assets from the estate tax in the future.

To transfer the remaining estate tax exclusion (technically the “deceased spousal unused exclusion” or “DSUE”) to the surviving spouse, the executor of the decedent’s estate must file a Form 706 with the IRS. Executors have nine months, or 15 months with an extension, to file this Form 706. But, for most estates, filing a Form 706 is optional and executors often forgo this option. Failure to file a Form 706 and transfer the DSUE is an oversight of which a surviving spouse is generally unaware until he or she engages in some estate planning down the road. Only then does the surviving spouse discover that no Form 706 was filed, the DSUE did not transfer, and that deadlines for correcting the problem have been missed. In such circumstances, the surviving spouse faces the decision of abandoning the decedent’s DSUE or pursuing a time consuming and expensive procedure to ask the IRS for permission to file a Form 706 late.

The IRS is aware of this common difficulty and in 2017 issued Revenue Procedure 2017-34 to provide some relief. Under that guidance, the IRS offered an expedited and simple means for an estate to file a Form 706 up to two years after a decedent’s death for the sole purpose of transferring the DSUE to the surviving spouse. This relief offered an extra nine months to file a Form 706 and transfer the DSUE to the surviving spouse beyond the normal Form 706 extended deadline. While beneficial, this relief was modest and still left many surviving spouses in a difficult position.

On July 8, 2022, the IRS issued Revenue Procedure 2022-32, which significantly broadened the previous relief.  With this new guidance, the IRS extended the deadline from two to five years following the decedent’s death.  This now offers substantial relief to surviving spouses who may struggle to transfer the DSUE under previously strict deadlines.  Taking advantage of this relief and securing a decedent’s DSUE may be especially crucial as the current lifetime exclusion of more than $12 million is scheduled to shrink to an estimated $6 million according to tax law changes that will take effect on January 1, 2026.

If your spouse passed away within the past five years and you are uncertain of your own estate tax situation, this new IRS guidance may offer you substantial relief.  Considering this new guidance and the upcoming tax changes in 2026, now is a good time to review existing estate plans and discuss any changes that may be needed.  If you have questions or would like additional information, please contact David Frederick, Senior Manager of Tax at David.Frederick@LBMC.com.