The death of a spouse creates both emotional loss and practical planning challenges. Estate planning for a surviving spouse requires attention to time-sensitive elections, trust administration responsibilities, asset management decisions, and updated planning for the survivor’s own estate. Making informed choices during this period can preserve significant tax benefits and ensure proper wealth transfer to the next generation.
The Portability Election
One of the most important decisions a surviving spouse faces is whether to make the portability election to claim the deceased spouse’s unused estate tax exemption.
Under IRC Section 2010(c)(4), the executor of a deceased spouse’s estate can elect to transfer any unused portion of the deceased spouse’s basic exclusion amount to the surviving spouse. This transferred amount is called the Deceased Spousal Unused Exclusion, or DSUE. The current basic exclusion amount is $15 million per person. If a deceased spouse used only $5 million of their exemption, the surviving spouse could potentially add the remaining $10 million to their own exemption, resulting in a combined exclusion of $25 million.
The portability election is not automatic. It requires filing a federal estate tax return, Form 706, even if no estate tax is due because the estate falls below the filing threshold. For estates not otherwise required to file, Revenue Procedure 2022-32 provides a simplified method allowing the election to be made within five years of the decedent’s death. The executor must include a statement at the top of the return indicating it is filed pursuant to the revenue procedure to elect portability.
For estates required to file Form 706 because the gross estate exceeds the basic exclusion amount, the portability election is made automatically unless the executor affirmatively opts out on the return. Once made, the election becomes irrevocable after the filing deadline, including extensions, has passed.
Several factors affect whether the portability election makes sense. The surviving spouse’s own estate size matters because portability provides little benefit if the combined estates will remain below the survivor’s own exemption. Remarriage is a consideration because the surviving spouse can only use the DSUE from their most recently deceased spouse, meaning a subsequent spouse’s death could replace the first spouse’s DSUE. The cost of preparing the estate tax return must be weighed against the potential tax savings. For most estates where there is any meaningful possibility the surviving spouse’s assets could grow or the exemption could decrease in the future, making the election is generally advisable.
Trust Administration After the First Spouse’s Death
When the deceased spouse had a revocable living trust, the surviving spouse often serves as successor trustee and must administer the trust according to its terms. A revocable trust typically becomes irrevocable upon the grantor’s death, meaning its terms can no longer be modified by anyone.
The trust may divide into separate subtrusts upon the first spouse’s death. Common structures include a survivor’s trust holding the surviving spouse’s assets, a marital trust or QTIP trust holding assets that qualify for the marital deduction, and a bypass or credit shelter trust designed to use the deceased spouse’s exemption. Each subtrust may have different terms regarding distributions, investment management, and ultimate disposition.
The successor trustee must gather and value all trust assets, notify beneficiaries as required by state law, pay the decedent’s debts and expenses, file required tax returns, and eventually distribute assets according to the trust terms. The trust becomes a separate taxpayer requiring its own Employer Identification Number for tax reporting purposes.
For income tax purposes, the formerly revocable trust will now file its own fiduciary income tax return, Form 1041. Under IRC Section 645, the executor and trustee may elect to treat a qualified revocable trust as part of the estate for income tax purposes, which can provide certain advantages including a potentially longer period to use a fiscal year and more favorable treatment of certain deductions.
Retitling Assets and Beneficiary Designations
The surviving spouse should review how all assets are titled and update beneficiary designations on retirement accounts, life insurance policies, and other beneficiary-designated assets.
Assets held in joint tenancy with right of survivorship pass automatically to the surviving spouse outside of probate. These assets should be retitled into the survivor’s individual name or transferred to trusts as appropriate for the survivor’s updated estate plan. Assets held in the deceased spouse’s individual name may need to pass through probate unless they were transferred to a trust during the decedent’s lifetime.
Beneficiary designations on IRAs, 401(k) plans, and life insurance should be reviewed immediately. The surviving spouse is typically named as primary beneficiary, and these designations may need to be updated to name contingent beneficiaries or trusts. Retirement accounts offer special options for surviving spouses, including treating inherited IRAs as their own, which can defer required minimum distributions and provide additional planning flexibility.
The Surviving Spouse’s Updated Estate Plan
With the first spouse’s death, the surviving spouse’s estate plan requires comprehensive review and likely revision.
The survivor’s will and trust documents may reference the deceased spouse in ways that no longer make sense. Successor trustees, executors, and agents under powers of attorney should be reviewed. The disposition of assets may need adjustment if the documents contemplated coordinated planning between both spouses’ estates.
The surviving spouse should evaluate whether their current plan adequately addresses their changed circumstances. A single person’s estate plan differs from a married couple’s plan. Considerations include whether the survivor wants assets to pass directly to children or through trusts, how to provide for children from prior marriages, whether charitable giving goals have changed, and how to structure assets for both asset protection and tax efficiency.
If the deceased spouse’s estate funded a credit shelter or bypass trust, the surviving spouse may have access to trust income and, depending on the trust terms, discretionary distributions of principal. Understanding what the survivor can receive from these trusts and what assets remain in the survivor’s individual control helps inform overall planning.
Tax Planning Considerations
The surviving spouse’s income tax situation changes significantly. Filing status shifts from married filing jointly to single after a transition year, which affects tax brackets and the standard deduction. Inherited assets receive a stepped-up basis to fair market value as of the date of death, eliminating built-in capital gains on appreciated property.
Estate tax planning should consider whether portability alone provides sufficient exemption or whether additional strategies are warranted. For larger estates, the surviving spouse might consider lifetime gifting to use available exemption, funding irrevocable trusts for descendants, or charitable planning. If the deceased spouse’s estate funded a bypass trust, those assets will not be included in the surviving spouse’s estate and will not receive a second basis step-up at the survivor’s death.
For surviving spouses who are not U.S. citizens, special rules apply. The unlimited marital deduction is not available unless assets pass to a Qualified Domestic Trust, or QDOT. If the deceased spouse’s estate did not establish a QDOT, the surviving noncitizen spouse cannot benefit from the marital deduction, potentially creating immediate estate tax liability.
Practical Steps for the Surviving Spouse
The period following a spouse’s death involves many practical tasks. The surviving spouse should locate and review all estate planning documents, including wills, trusts, powers of attorney, and beneficiary designation forms. Death certificates should be obtained in sufficient quantity for financial institutions and government agencies.
Financial accounts held jointly will need documentation of the spouse’s death for the survivor to gain sole control. Life insurance claims must be filed. Social Security benefits should be claimed, with attention to the coordination between the survivor’s own benefits and survivor benefits based on the deceased spouse’s record.
The surviving spouse should work with qualified advisors including an estate planning attorney, tax professional, and financial advisor to coordinate the various moving parts. Time-sensitive elections like portability have deadlines that, if missed, may result in lost opportunities.
Conclusion
Estate planning for a surviving spouse involves navigating complex decisions during a difficult time. The portability election can preserve millions of dollars in estate tax exemption. Trust administration requires careful attention to fiduciary duties. Asset retitling and beneficiary updates ensure property passes as intended. An updated estate plan reflects the survivor’s changed circumstances.
For assistance with estate planning after the loss of a spouse, including portability elections and trust administration, consider consulting Mark Pierce and Matt Meuli at Wyoming Trust Attorney.