What Is the Last Surviving Spouse Rule?

Estate planning can be a significant part of successful financial management, especially for married couples. One key consideration is minimizing estate taxes, which can substantially affect the distribution of money and property to a married couple’s loved ones. 

What Are Gift and Estate Taxes?

In 2024, a $13.61 million federal exemption per person for gifts and estate taxes means many individuals with a high net worth will not owe federal estate tax if they die in 2024. An individual can give away up to $13.61 million in 2024 to children or other nonspouse beneficiaries during their lifetime or after their death. They will pay 40 percent in estate taxes only on gifts that exceed that amount.

You may believe you or your spouse will never have more than $27.22 million combined; but the current exclusion will revert to the pre-2017 amount—$5 million adjusted for inflation—on January 1, 2026, if Congress does not act. 

That means the 40 percent estate tax rate could apply to gifts over approximately $6.4 million come 2026, requiring many families with high net worth to reevaluate their estate plan and adjust legal strategies to preserve and protect more of their property and investments. Changes may include taking advantage of the deceased spousal unused exclusion amount (DSUEA) if they pass away prior to January 1, 2026.

What Is the Deceased Spousal Unused Exclusion Amount? 

The Tax Relief Act of 2010 introduced the concept of portability—the ability of a surviving spouse to use their deceased spouse’s unused exclusion amount—and made it permanent in 2013. Before then, if a person died with wealth below the federal estate tax exemption amount and did not use their exemption, it was lost forever. 

Today, the DSUEA can be used to increase the estate tax exemption for the surviving spouse. When the first spouse dies, the other can elect to port their spouse’s unused exemption within five years of the spouse’s death and add the unused exemption to their own. To have the DSUEA available for the surviving spouse to use, a representative of the decedent’s estate, possibly the spouse, must file a federal estate tax return (Form 706) to report the DSUEA. 

Widows and Widowers Cannot Collect Estate Tax Exclusions

If you are a widow or widower who has been married before, the portability rule lets you use the DSUEA of your last deceased spouse to offset the tax on any transfer during your life or at death. If you have more than one predeceased spouse, you can use the DSUEA of multiple spouses, but the decedent whose DSUEA is being used must be the survivor’s last predeceased spouse when their DSUEA is being used. A surviving spouse may not use the sum of DSUEA from multiple predeceased spouses at one time or apply the DSUEA after the death of a subsequent spouse.

How It Works

Portability can make a significant difference when it comes to the taxation of an estate.

Remarriage with Second Spouse Dying

Example. Bob and Sue were married with jointly titled property and a net worth of $16 million. Bob died first in 2020 with a federal estate tax exemption of $11.58 million. Sue inherited all of Bob’s property, and because of the unlimited marital deduction, none of Bob’s exemption was used. Sue elected portability by filing an estate tax return on time, and was able to add Bob’s $11.58 million to her own exemption of $12.92 million. Sue gets remarried to Dan in 2021. Dan dies in 2022, and after an estate tax return is filed, he has a DSUEA of $6 million. Sue then dies in 2023 with an estate worth $16 million. At her death, she has her estate tax exclusion amount of $12.92 million and Dan’s $6 million since he was her last predeceased spouse.

If Sue had a larger estate or wanted to make gifts during her lifetime, she may be able to make large lifetime gifts over the annual exclusion amount ($17,000 in 2024) during her lifetime while Bob was her last predeceased spouse (before Dan dies) and use Bob’s DSUEA to prevent having to pay gift tax on the large lifetime gifts. As soon as Dan dies, however, he becomes her last predeceased spouse and she will no longer be able to use Bob’s DSUEA.

Tax Planning Can Get Tricky

We understand that trying to navigate the tax rules can be a daunting task. We are here to assist you in better understanding the options available to you and crafting the best estate and financial plan to meet your unique situation. To learn more about strategies to protect yourself, your loved ones, and your life savings, give us a call.

Watch Out for Stolen Items in Your Loved One’s Estate

Your family member went through a meticulous estate planning process to organize and distribute money and property for the benefit of their loved ones, including you. But you may suspect that some of the high-value items in their estate originated as stolen property. The possibility of discovering stolen items within an estate is often overlooked, but it can have legal, financial, and emotional complications. How does it happen?

Example: Stolen Artwork

A New York Times article published in 2023 reported that the New York Metropolitan Museum is carefully combing through its art collections after the government seized dozens of art pieces that were suspected of having been stolen or looted in the past. It is widely known that art collections have mysteriously disappeared over the centuries, especially during wartime, and that ownership should be researched to avoid purchasing an item that belongs to someone else. The Art Loss Register alone lists 700,000 stolen items. Many items find their way into legitimate markets through underground dealers where criminals can exploit innocent buyers. 

When putting together your estate plan, any significant collections you own should be taken into consideration. If your loved one receives stolen items from you at your death, they may not receive legal title to the item, exposing the estate to financial and tax implications. If artwork or other high-value property is removed from the estate, it can affect the liquidity necessary to meet potential estate tax and administrative costs as well as the inheritance of beneficiaries. An estate planning attorney can prepare for different scenarios to protect you and your family.

Private Letter Rulings and Seized Assets 

According to a private letter ruling, if your family discovers stolen items after a loved one’s death, the Internal Revenue Service could include the fair market value of the property in the deceased’s estate for estate tax purposes, even after it has been seized and returned to the owner. This could leave the family owing an estate tax but unable to sell the item in order to pay the estate tax.

The government can seize property it believes has been involved in illicit or criminal activity. Even if your family member purchased an item from a reputable dealer or inherited the item decades ago, it can still be taken. 

How People Come into Possession of Stolen Items

Understanding how individuals unknowingly acquire stolen items is crucial for recognizing potential risks. Innocent parties often purchase items through estate sales or auctions or receive gifts from friends or family members. A lack of transparent ownership or a historical record can make it challenging for the unsuspecting owner to identify stolen items.

Every year, over one million homes are burglarized and almost one hundred billion in store merchandise is stolen. Billions in stolen property is circulating, leaving innocent buyers liable. Those possessing stolen items can serve time in jail or be forced to pay a fine.

Common places to come across stolen goods are online marketplaces such as Craigslist, eBay, or Facebook Marketplace that have lax regulations for selling items. Pawn shops can often be unsure of the origins of their inventory, but they are required to research ownership or face prosecution.

Can You Be Held Accountable?

Not everyone is held accountable for being in possession of stolen goods. There is no statute of limitations for prior owners to claim their stolen property, but there are legal defenses used for possessing it. The defense of laches asserts that prior owners who unreasonably delayed asserting their rights may not be entitled to bring a claim against the person or estate in possession of their property. After all, the property may have already been sold and the proceeds divided among heirs, making it very difficult to recover. 

Whether you can be prosecuted or convicted of possessing stolen property depends on several factors:

  • Knowledge that the item was stolen. Suspected stolen items should be reported to law enforcement, or you could be held accountable. However, if it was nearly impossible to know it was stolen, you will likely not be held accountable.
  • Knowledge that the item was in your possession. You can unknowingly be in possession of a stolen item. If you are honest, open, and prompt, you should not be held accountable.

What Should You Do If You Suspect Ownership of Stolen Property?

You can take steps during your family member’s lifetime to address your suspicions. Be proactive. If there is a hint of uncertainty about the legitimacy of an item, your estate planning attorney can take the following steps:

  • Research the item’s history and provenance to trace its ownership back to its origin to see whether it has ever been reported as stolen.
  • Seek guidance from professionals such as art historians, appraisers, or legal experts who specialize in stolen art and property. They can validate legitimate ownership.
  • Report the situation to law enforcement in a timely manner to contribute to the recovery of stolen property and prevent legal complications down the line.

There is a risk of discovering stolen items within a loved one’s estate, especially with high-value collections. Do not overlook this when doing your estate planning. By being vigilant, understanding the legal implications, and taking proactive steps, you can mitigate the risks of inheriting or owning stolen property and ensure a smoother estate settlement process for you or your loved ones. Contact our estate planning attorney today.

A Proper Estate Plan Can Protect You and Your Family

Proper estate planning can protect you from the risks of owning stolen property through due diligence and research, ensuring that the prior owner’s rights are extinguished. Unfortunately, research into the origins of property can be expensive, often costing more than the item’s value. However, where there is one suspicious item, there may be more. 

If you are the beneficiary of gifts with suspicious origins, you can disclaim them. If you have questions about something in your collection or your recent inheritance, you can contact our office.

Testamentary Trusts: The Best of Both Worlds

You have several different options when it comes to creating the right estate plan. Some people believe that a revocable living trust is the best way to go, while others think that a last will and testament (commonly known as a will) is best under certain circumstances. Others may find that a combination of both—through the use of a testamentary trust—provides the right amount of control and protection for themselves and their loved ones.

A Testamentary Trust Can Provide a Solution

A testamentary trust will own accounts and property owned by you in your sole name without beneficiary designations, upon your death and enables you to instruct how your money and property will be handled in advance. Unlike a revocable living trust, the testamentary trust is created at your death, and ownership of your accounts and property are transferred to the trust through the probate process. 

You Can Protect Your Loved Ones

Depending on your circumstances, your loved ones may need the extra protection that a testamentary trust can provide. 

  • Surviving spouse. Some couples are hesitant to leave everything to their surviving spouse out of fear that the surviving spouse could be taken advantage of, remarry, or otherwise lose the money and property that was left to them. A testamentary trust can allow a surviving spouse to access the money and property while including extra protections to safeguard it.
  • Minor child. In most states, minor children cannot legally own anything. If money and property are left to a minor, the court may need to appoint someone to manage the inheritance and make sure that it is used appropriately. A testamentary trust allows you to select the person to manage the inheritance and provide specific instructions about how the money and property should be used.
  • Special needs individual. If you have a loved one who is currently receiving or may need to avail themselves of certain government benefits due to a disability, a poorly structured inheritance can jeopardize their ability to qualify or keep those government benefits that they need to survive. A properly structured testamentary trust can provide funds to your loved one to supplement what they are receiving from the government without disqualifying them from government assistance.

Your Loved Ones Will Still Have to Go Through Probate

Although you are using a trust to manage and distribute money and property to your loved ones, the probate court will still have to be involved. As opposed to a revocable living trust that is created during your lifetime, a testamentary trust comes into existence at your death during the probate process. The person you name as the executor or personal representative will oversee changing the ownership of your accounts and property from you as an individual to the trustee of the testamentary trust. Once ownership of accounts and property has been changed, the trustee will manage the trust according to the instructions in the will for the trust’s duration. When all of the accounts and property have been given to the intended beneficiaries, the trust terminates. During the administration, the trustee may be required to provide annual reports to the court and other important parties and may have to periodically appear before the judge.

Although the probate process can be time-consuming, expensive, and public, it may be the right option in some circumstances. Some people find that it provides stability and harmony by allowing a third party (the probate court) to oversee the process. This can help families who may otherwise argue over the details to remain cordial and on their best behavior.

Do Not Forget Other Important Documents

Even if you choose to include a testamentary trust as part of your will, there are other important estate planning tools you must have to properly protect yourself and your loved ones. Because a will only covers what happens to your money and property when you pass away, we must also plan for a situation in which you are alive but unable to make your own decisions, which is known as incapacity.

Financial Power of Attorney

A financial power of attorney allows you to choose a trusted person (the agent) to handle your personal financial matters without court involvement. The amount of authority your agent has is determined by the type of financial power of attorney you have prepared. It can be as limited or as broad as you would like. Another important consideration when preparing a financial power of attorney is choosing when the agent can act. One option is to enable the agent to act immediately once you have signed the document. A second option is to have a springing financial power of attorney that only becomes effective once it has been determined that you cannot manage your affairs. It is important to note that some states do not allow springing powers of attorney. 

Medical Power of Attorney

A medical power of attorney allows you to appoint a trusted person as a decision-maker to communicate on your behalf or make healthcare decisions for you without court involvement. 

Advance Directive or Living Will

An advance directive or living will allows you to convey your wishes regarding end-of-life decisions, such as how long to continue artificial hydration and nutrition or how long to continue artificial respiration when you are in a persistent vegetative state or have a terminal condition and with no chance of recovery. This document will help the decision-maker under your medical power of attorney make informed choices for your care. 

HIPAA Authorization

A Health Insurance Portability and Accountability Act of 1996 (HIPAA) authorization form allows you to grant specific individuals access to your confidential and protected information (e.g., to get a status update on your condition or receive your test results) without giving those individuals the authority to make decisions on your behalf. Providing this information to your loved ones can help all parties stay on the same page even if only one person is authorized to make medical decisions on your behalf.

Nomination of Guardian

Some states have a separate document that allows you to nominate a guardian for your minor child. Some people prefer the separate document because they can change guardians with ease and without having to update their entire will or pour-over will. This document can be referenced in your will so that your nomination will be known during the probate process.

Temporary Guardianship

Some states allow for a separate document in which to name a person to make decisions for your minor child when you are unable, such as if you are incapacitated or traveling without your child and need to give someone authority to make decisions for your child in your absence. It is important to note that this document is only effective for a short period (typically six months to a year), and a temporary guardian cannot agree to certain actions, such as the child’s adoption or marriage. 

Let’s Choose the Right Option for You and Your Loved Ones

There are many different options when it comes to crafting a plan that is right for you. We are committed to developing a plan that protects you, your loved ones, and your legacy. If you are interested in learning more about testamentary trusts or reviewing your existing estate plan, please give us a call.