Portability of a Spouse’s Unused Exemption

Key Considerations in 2025

• Effective in 2025, the federal estate and gift tax exemption is $13.99 million for U.S. persons. This exemption is scheduled to be cut in half as of January 1, 2026, unless the law is changed before then.
• The recent re-election of President Donald J. Trump and Republican majorities in both houses of Congress suggests that Congress will act to maintain the current exemption level (with inflation adjustments) for the next several years.
• “Portability” of the deceased spouse’s unused exemption is an important estate planning tool available to married couples. It allows the couple to use the full exemptions available to both spouses by allowing a deceased spouse’s unused exemption amount to be transferred to the surviving spouse. This technique greatly enhances the potential for tax-free wealth transfer.

Federal law imposes an estate (and gift) tax on the transfer of wealth from one person to another. The law also imposes an additional layer of tax called the Generation-Skipping Transfer (GST) tax on transfers of wealth to “skip persons,” such as grandchildren. However, the law also allows various deductions, exemptions, and exclusions that greatly reduce these taxes. Apart from one anomalous year (2010) when the estate tax was temporarily repealed, the estate and gift tax exemption amount is now the highest it has ever been – $13.99 million per person. Through careful estate planning, many people are able to successfully pass on even more wealth than that free of tax.

Effective in 2011, Congress enacted the “portability” rule, which allows for the transfer of the unused portion of a decedent’s estate tax exemption (aka the “DSUE”) to his or her surviving spouse. Before then, the unused exemption would just disappear. This technique is especially meaningful now with such high exemptions. And it is particularly significant in cases where two spouses have disparate levels of wealth.

There are three things to note about portability:

1.  Portability is not automatic (an estate tax return must be filed to elect it)
2.  It does not apply the GST tax exemption, and
3.  It does not apply at the state level except in two states (Maryland and Hawaii)

Making a portability election is easy to do but it’s also easy to overlook when a federal estate tax return is not required to be filed—which is most cases given the high exemption. While the notion of portability is easy enough to conceptualize, the actual rules are fairly complex—and definitely not on everyone’s radar.

Making the Portability Election

The estate of an individual who dies with assets under the estate tax exemption amount is not required to file a federal estate tax return. However, the executor of the estate should consider the benefit of filing one to elect portability of the DSUE if the decedent was survived by a spouse. If you don’t file the estate tax return, you won’t be able to port over the DSUE. Normally, an estate tax return is due nine months after the date of death (a six-month extension is available). The portability rules require that the portability election be made on a timely filed estate tax return if one is required to be filed. However, if an estate return is not otherwise required to be filed, and is filed only to elect portability, the IRS allows it to be filed anytime on or before the fifth anniversary of decedent’s death.¹

Despite the tremendous benefits of making a portability election, many estates don’t take advantage of it. The Urban-Brookings Tax Policy Center estimated that in 2022 only about 7,600 estate tax returns were filed, of which only 3,900 were for taxable estates. To put that in perspective, the Census Bureau estimates that about 2.8 million Americans died in 2022. Thus, an estate tax return was filed for only about 0.25 percent of these decedents, and only about 0.14 percent owed any estate tax. This data suggests that many estates are not making a portability election when they could. While the portability election may make no difference in the majority of cases, there are surely many missed opportunities. The IRS’s recent extension of the late filing deadline from 2 to 5 years after death was done because the IRS received so many petitions for relief from people who missed (or didn’t know about) the filing deadline or the need to make an affirmative portability election. Oftentimes, it’s the surviving spouse’s new lawyer, accountant or financial planner who catches the mistake and seeks to rectify it.

The potential slashing of the estate tax exemption in 2026 should have prompted more estate tax filings in the last few years to elect portability of one DSUE. Although the threat of a much-reduced exemption is now less of a concern than it was prior to Election Day 2024, it is still on the table as a possibility at some point in the future. So, it is advisable to carefully consider whether to file an estate tax return even if it is for the purpose of electing portability. An estate tax return should absolutely be filed if the decedent was survived by a spouse who has considerable wealth. Doing so could save millions of dollars in taxes.

Making a portability election
could save millions of dollars in taxes.

The Impact of Portability: A Case Study

Assume that a married couple (Bob and Judy) live in Florida, which has no state estate tax. They have of combined net worth of $33 million. Judy’s net worth is $30 million and Bob has an investment account worth $3 million (and no other assets). Bob plans to leave his assets to their children since Judy is already financially well off.

Assume that Bob dies in 2025 and Judy dies a few years later leaving all of her assets to trusts for their descendants. Assume further that the estate tax exemption remains fixed at $13.99 million.

Question: How much estate tax will they collectively owe if both Bob and Judy die? Assume no other deductions and the tax is 40%? What if they elect (or fail to elect) to port over Bob’s DSUE?

Compare to Not Making a Portability Election

Let’s assume that after Bob died, his estate did not make a timely portability election. How much estate tax would be due on Judy’s death?

The answer is $6,404,000
(i.e., ($30,000,000 – $13,990,000) = $16,010,000 x 40%)

That’s a difference of $4,396,000 of additional estate tax owed.

Instead of transferring $30.992 million to their family, they would transfer $24.588 million instead, just because they didn’t make the portability election after Bob died.

What is the Possibility of a “Clawback” of Portability When the Exemption is Reduced?

The IRS has made it clear that there will be no reduction or “clawback” of any transferred DSUE should the estate tax exemption be reduced in the future.

What if You Remarry?

A surviving spouse who has remarried could have more than one predeceased spouse.

A surviving spouse may use only the DSUE of the “last deceased spouse.”

What About the GST Tax?

The GST tax does not work in tandem with estate tax but in addition to it. So, in theory, both taxes can apply; but that is almost unheard of. Nonetheless, there is still planning that can be done to prevent a waste of the GST exemption for a married couple by properly structuring a marital trust and making appropriate tax elections.

The GST tax exemption is currently the same amount as the estate tax exemption. Therefore, long-term trusts of $13.99 million per person can be funded and made exempt from a 40% generation-skipping transfer tax when they pay out to grandchildren or more remote descendants.

As we said, the portability rule does not apply to the GST tax.

Stepped-up Basis

One of the most cherished features of the federal tax code is stepped-up basis at death. “Stepped-up basis” is shorthand for the rule that inherited property takes on a new cost basis, which is its value as of the date of death. If and when you sell such property, your capital gain is measured with respect to that new basis.² The combination of stepped-up basis, the high estate tax exemption and portability of a deceased spouse’s unused exemption, allows nearly $28 million of a family’s wealth to transfer to friends and family (or trusts for their benefit) without any federal estate or income tax. And, depending the order of death and the planning used, a second basis step-up can be achieved when the surviving spouse dies.

State Estate Taxes

Twelve states and the District of Columbia impose an estate tax.³ Only two (Maryland and Hawaii) allow portability of the state’s exemption to a surviving spouse. So, depending on the situation, state estate taxes could apply. Most states with an estate tax have an exemption that is less than the federal exemption. Note that even if you are a resident of a state with no estate tax, your estate could be subject to state estate tax if you own property located in a state that has an estate tax. For example, a home in the Hamptons or Nantucket could be subject to state estate tax even if you’re a resident of Florida. That’s because any asset physically situated in the state can be dragged into the state’s taxing regime. Because of lower state exemptions, the possibility of a state estate tax is very real in these situations.

Possibility of Repeal of the Estate Tax

An outright repeal of the estate tax seems unlikely, although nothing is off the table. We believe that given the rules of the budget reconciliation process, which will require certain “pay-fors” to offset new tax breaks. Stripping out a revenue-producing item like the estate tax (albeit a small one) seems unlikely. As the data bears out, only a very small number of estates actually owe any estate tax. Since many more taxpayers value stepped-up basis at death than estate tax repeal, lawmakers probably may not be willing to trade the step-up, which is already the law, for a repeal of the estate tax. But anything is possible in today’s political climate.

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Conclusion

The example given above is a simple one used to illustrate a point. There are other estate planning techniques that can be used to maximize both spouse’s exemptions. We encourage you to consult your attorney about your own estate planning and make the most of these available tools. Surviving spouses should seriously consider the potential advantages of timely filing an estate tax return to make the portability election even if the tax form is not required to be filed. Doing so, could save your heirs millions of dollars in taxes.

If you have questions about estate planning, we invite you to contact your Portfolio Manager or Client Advisor who would be happy to help you.

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