What to Know About Portability

Tax Planning

The months after the loss of a spouse are difficult for a variety of reasons, not the least of which is the grief of losing a lifelong partner. Of course, there is also the matter of administering the estate of a deceased spouse, which includes dealing with tax issues. Fortunately, the vast majority of decedents’ estates do not owe estate tax because of the lifetime exclusion amount. In essence, the government allows a certain amount of a deceased person’s estate to be exempt from estate tax. In 2022, that lifetime exemption amount is $12.06 million for an individual, and $24.12 million for a married couple. There is also an unlimited marital deduction in U.S. tax law, which allows an individual to transfer an unlimited amount of assets to a U.S. citizen spouse at any time (including their death) free of tax. When one spouse dies, leaving their entire estate to their surviving spouse, there is no estate tax for this reason, regardless of the size of the estate. However, when the second spouse dies, their estate (consisting of all the property the couple accumulated together) could be exposed to estate tax. This can create an estate tax “trap,” if you will, at the death of the second spouse. Portability helps to avoid that outcome.

How Portability Works

Because of the unlimited marital deduction “trap,” the first spouse in a couple to die is very unlikely to use up all of their lifetime exclusion amount (if they use any). The unused amount, called the “deceased spousal unused exclusion,” or DSUE, is “portable.” That means that it can be added onto (ported over to) the exclusion amount of the surviving spouse when they die, thus allowing the surviving spouse’s estate to “shield” a greater amount of assets from estate taxation.

Let’s take a look at the importance of making the portability election. Let’s assume that Chris and Stacy are married and have a total estate worth $4 million. When Chris passes away, he leaves everything to Stacy and uses none of his $12 million exclusion amount (because it passed to Stacy under the unlimited marital deduction). Stacy survives for another 15 years, but in the year of her death, her exclusion amount is now only $1 million (which was the limit in 2010). Since she has $4 million in assets and only a $1 million exclusion amount of her own, the excess $3 million will be subject to a 40% estate tax and her estate will have to pay the federal government $1.2 million in federal estate taxation.

If, on the other hand, Stacy had made the portability election upon Chris’s death, she would have been able to add his $12 million in unused exclusion amount onto her $1 million exclusion amount, thus giving her a total exclusion amount of $13 million. If she had done that, in this scenario, no federal estate tax would be due and owing, because she had $13 million worth of protection and only $4 million in assets to protect.

As you can see, portability of the DSUE has some major tax benefits. It’s not perfect; for instance, most of the states that have their own estate tax do not allow any unused estate tax exclusion from one spouse to be applied to the estate of a surviving spouse. And portability does not apply to the federal Generation-Skipping Transfer Tax exemption (a separate tax that is imposed on gifts to persons more than one generation from decedent, such as grandchildren).

How to Elect Portability of the Deceased Spousal Unused Exclusion

If you’ve been convinced of the value of electing portability for a spouse’s unused estate tax exclusion, you’re probably wondering how to do it. If you are the personal representative of your late spouse’s estate, the answer is that you must file IRS Form 706, Estate (and Generation-Skipping Transfer) Tax return for your spouse’s estate and indicate your intention to apply the Deceased Spousal Unused Exclusion amount to your own estate. Your probate administration attorney can help you with this.

There is some good news on this score. The amount of time in which a surviving spouse has to make this election has recently been increased by the Internal Revenue Service. At one time, an executor had only nine months from the date of the decedent’s death to elect portability; a six-month extension to file the required form was automatically available. The IRS could, in its discretion, further extend the time to File Form 706. Because so many people were requesting these discretionary extensions, the IRS in 2017 granted a blanket two-year extension of the time to request portability of the DSUE. However, people were still requesting extensions beyond the two year period.

Recent Extension of Time to File for Portability

Finally, in 2022, the IRS extended the time to file Form 706 from two years from the date of the first spouse’s death to five years from the date of death. The obvious benefit of this is that a surviving spouse does not need to rush to make an election when they may be dealing with their grief and other urgent issues.

There is another advantage as well. The amount of the lifetime estate tax exclusion is currently at a historic high. However, at the end of 2025, the amount will be significantly reduced. The exclusion will “sunset” to the level at which it was prior to the enactment of the 2017 Tax Cuts and Jobs Act. Essentially, the exclusion will be cut in half, potentially exposing many more estates to taxation. There are also proposals to reduce the exclusion amount to as low as $3.5 million and, as noted above, it was not that long ago that the exclusion amount was only $1 million. Therefore, the extension of the time to request portability gives the personal representative of an estate time to determine whether portability is needed.

Estate tax planning issues can be complicated. If you have questions about estate tax liability for a surviving spouse, please contact Estate Planning & Elder Law Services to schedule a consultation.

Related Articles