In its simplest terms, “portability” allows surviving spouses to add any unused federal estate and gift tax exemptions of their deceased spouse to their own.

Background

The federal estate and gift tax exemption is the amount of assets that an individual is allowed to transfer from their estate to other people or entities free of federal estate and gift tax.

Prior to 2010, any part of the federal estate and gift tax exemption amount that was unused by an estate was simply lost. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Act) introduced “portability” of the deceased spouse’s unused exemption (DSUE).

On Dec. 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, which provided for a $10 million federal estate and gift tax exemption (adjusted for inflation to $12,920,000 for 2023 and $13,610,000 for 2024) and a 40% maximum federal estate tax rate for assets owned in excess of $12,920,000 for 2023.

In addition, the Tax Cuts and Jobs Act also continued “portability” of the federal estate and gift tax exemption implemented under the 2010 Tax Act, whereby a decedent’s surviving spouse would be able to use the DSUE, effectively doubling the federal estate and gift tax exemption amount for married couples (i.e., in 2023, a married couple could shelter $25,840,000 [$12,920,000 exemption x 2 = $25,840,000] from estate taxes).

Benefits of Portability

The obvious benefit of electing portability of the DSUE is the potential for married individuals to significantly reduce or eliminate the estate tax burden, because the decedent will have their own federal estate and gift tax exemption amount plus the DSUE to use for exempting assets from estate taxes at death with very minimal or no estate tax planning.

Portability can also provide flexibility and eliminate administrative complexity for married couples in estate planning. For example, since it doesn’t require the creation of a credit shelter trust (and the corresponding administrative requirements of a separate trust) at the first spouse’s death, a surviving spouse can still access the entire marital estate for their lifetime, without restriction, while still retaining the DSUE for federal estate and gift tax planning purposes.

In addition, while the surviving spouse’s estate may seemingly not be large enough to necessitate portability at the time of the first spouse’s death, the surviving spouse may still want to file the Form 706 to elect portability just to be safe.

For example, the surviving spouse’s estate could appreciate significantly in the future, depending on the age and earnings potential of the surviving spouse. In addition, the surviving spouse may receive an inheritance in the future or the surviving spouse may come upon some other financial windfall in the future – any of which circumstances could bring the surviving spouse’s estate above the federal estate and gift tax exemption amount.

There is also the possibility that the federal estate and gift tax exemption will decrease in the future – but if the DSUE was ported, the surviving spouse would lock in the potentially higher DSUE of their deceased spouse, irrespective of future federal estate and gift tax law changes.

As it stands today, the Tax Cuts and Jobs Act is set to sunset on Dec. 31, 2025, which means that in 2026, the federal estate and gift tax laws will revert back to the laws in effect in 2017 (i.e., $5 million exemption amount adjusted for inflation).

Requirements for Electing Portability of DSUE

In order for the surviving spouse to receive portability of the DSUE, an affirmative election must be made on the deceased spouse’s Form 706 United States Estate (and Generation-Skipping Transfer) Tax Return (Form 706) that is filed with the Internal Revenue Service (IRS), even if a Form 706 would not otherwise be required to be filed at the first spouse’s death.

Prior to 2022, in order to elect portability of the DSUE, the Form 706 would have had to be filed no later than 18 months from the date of the decedent’s death. The only other option before 2022 would have been to request a Private Letter Ruling (PLR) from the IRS in order to permit a filing of the Form 706 to elect portability of the DSUE later than 18 months after the decedent’s death.

A PLR request can be quite costly, as the filing fee with the IRS alone is in excess of $10,000, which would be in addition to any professional fees (e.g., attorney fees, CPA fees, etc.) involved in obtaining a PLR.

However, in 2022, the IRS issued Revenue Procedure 2022-32, which allows the personal representative of an estate to file a Form 706 for a decedent in order to elect portability of the DSUE within 5 years of the decedent’s death if the following criteria are met:

• the decedent’s estate wasn’t otherwise required to file a Form 706;

• the Form 706 was not timely filed after the decedent’s death;

• the decedent died after Dec. 31, 2010;

• the decedent was survived by a spouse; and

• the decedent was a U.S. citizen.

Caveats of Portability

While there are many benefits to portability, there are also limitations to portability to consider.

Portability only applies to federal estate and gift taxes, not generation-skipping transfer taxes. This means that, in most cases, the DSUE cannot be used to shield direct transfers to grandchildren from taxes.

Further, while the federal estate and gift tax exemption is indexed for inflation, DSUE is not, so over time the benefit of porting the DSUE may be eroded by inflation.

Portability is only available between spouses and only the most recent deceased spouse’s DSUE amount can be used, which could be a disadvantage in the case of a death and remarriage.

An example: Jennifer was married to Joseph and Joseph died in 2018. Jennifer timely filed a Form 706 to elect portability of Joseph’s DSUE of $8,950,000 following Joseph’s death. Subsequently, Jennifer married Paul. If Jennifer dies before Paul, then, in all events, Jennifer will have her estate and gift tax exemption amount plus the $8,950,000 of DSUE she ported from her first husband, Joseph.

However, if Paul dies before Jennifer, then Paul become Jennifer’s “most recent deceased spouse.” This wouldn’t be a problem for Jennifer if Paul had most or all of his exemption amount remaining at his death.

However, if Paul had made substantial gifts during his lifetime or structured his estate to plan to utilize all of his remaining exemption amount upon his death by leaving assets directly to his children, then Paul would not have any DSUE for Jennifer to port, as her most recent deceased spouse – and Jennifer would also lose the $8,950,000 of DSUE from Joseph that she had ported.

Should You Elect Portability of DSUE?

In theory, electing portability of DSUE is a “no-brainer” – take the free tax credit even if you will never need it. In practice, the procedure for preparing and filing the Form 706 to elect portability can be burdensome and, in some cases, time-sensitive. That, coupled with the historically high estate and gift tax exemption amounts, has led many people to choose not to elect portability of DSUE.

However, aside from the cost (typically a few thousand dollars) of preparing and filing the Form 706 to elect DSUE, there is very little downside to electing portability upon the death of the first spouse, while the upside could literally be millions of dollars in tax savings for a decedent’s heirs and beneficiaries.

This article was originally published on the State Bar of Wisconsin’s Solo/Small Firm & General Practice Blog of the Solo/Small Firm & General Practice Section. Visit the State Bar sections or the Solo/Small Firm & General Practice Section webpages to learn more about the benefits of section membership.