The surviving spouse should file a Form 706 for the first spouse to die. This enables the estate tax deduction (currently over $10 million) to be applied to the first spouse’s estate. Any remaining estate tax deduction can then be added to the surviving spouse’s estate tax deduction.
Example:
Spouse #1 has an estate of $5 million.
Spouse #2 has an estate of $9 million.
If Spouse #1 dies and a Form 706 is not filed, the estate passes tax-free to Spouse # 2. Then Spouse #2 has an estate of $14 million of which $4 million is subject to 40% estate tax on her death = $1.6 million tax.
If Spouse #1 dies and a Form 706 is filed, the estate tax deduction means that there is no estate tax. Now $10 M minus $5 M = $5 M can be added to Spouse #2’s estate tax deduction = $15 million. Since this is more than Spouse #2’s estate, NO estate tax will be owed when Spouse #2 dies.
Needless to say, a record of this should be provided to Spouse #2’s executor.
Form 706 must be filed on behalf of a deceased U.S. citizen or resident whose gross estate, adjusted taxable gifts, and specific exemptions exceed $12.06 million in 2022 (adjusted to $12.92 million in 2023, to account for inflation).
This brings up an interesting question. If spouse 1 dies, files estate tax forms, and “carries over” $5M deduction, but then a few years later tax law changes, perhaps with only a $3M deduction, does spouse 2 still have that excess $5M deduction from spouse 1 (who died under old tax law)?