Here's one you need to be aware of...say Joe dies in 2011 and his estate is worth, at best, $2 million. No need to file an estate tax return if all is going to the widow, right? Well...maybe. Sure his $5 million lifetime exclusion is enough to absorb this $2 million without doing anything. And who would ever expect his wife to need anything more than her own $5 million exclusion to cover the money she got from Joe and her own $2 million, so why bother. And anyway, it costs, what, hundreds of dollars to file the return; money down the toilet.
But what if Joe died in an accident and his estate succeeds in obtaining a multi-million award? Or his life insurance was several million dollars. Or Mrs. Joe hits the lottery. Or Joe's business turns out to own a very valuable asset and Mrs. Joe sells it for the very windfall Joe had been chasing his whole life. Or her combined $4 million is invested really, really well. On Mrs. Joe's death her estate is worth $8 million (let's assume the current law has been retained). Do Joe's and Mrs. Joe's children take all $8 million since they can apply Mrs. Joe's $5 million (all still intact) and Joe's remaining $3 million (remember he had $5 million and his estate was $2 million, presumably leaving $3 million). Sorry, no, you lose.
Remember the hundreds of dollars and aggravation the family saved by not filing an estate tax return on Joe's death? Well, by not doing that Mrs. Joe's estate cannot claim the $3 million Joe left on the table. Lost. Vanished. Gone for good. Instead of applying all $8 million against Mrs. Joe's $8 million estate and having no...zip...zero federal estate tax, the estate will have to pay tax on $3 million. That's about $900,000 to Uncle Sam. Good for the federal deficit, bad for the Joe family. And all to save a few hundred dollars.
So what do we learn here? File the return on the first estate and make the appropriate election to use the DSUEA.
Next time...what if Mrs. Joe had remarried?