How the Estate Tax Portability Election Works
An overview of the portability election, a provision allowing a surviving spouse to add a deceased spouse's unused estate tax exemption to their own.
The federal estate tax system allows a surviving spouse to use their deceased spouse’s unused estate and gift tax exemption. This concept, known as portability, provides flexibility in estate planning. The transferred amount is officially called the Deceased Spousal Unused Exclusion (DSUE).
Portability allows a married couple to use their combined exemptions without requiring complex legal structures like bypass trusts. Before this provision became a permanent part of the tax code with the American Taxpayer Relief Act of 2012, any unused exemption from the first spouse to die was permanently lost. Now, the surviving spouse can add the DSUE amount to their own exemption, but this election is not automatic and requires action by the deceased’s estate.
Determining Eligibility for the Election
The deceased person must have been a U.S. citizen or resident at the time of death. Estate tax regulations for nonresidents who are not citizens are different. A resident is someone who was domiciled in the United States at their death, meaning they lived in the U.S. with no definite present intention of leaving.
The couple must have been legally married at the time of the first spouse’s death, and the person making the election must be the federally recognized surviving spouse. The election is made on behalf of the deceased spouse’s estate by its executor.
Eligibility is not dependent on the size of the deceased’s estate. An estate tax return can be filed to elect portability even if the estate’s value is below the normal filing threshold. This allows smaller estates to pass on tax benefits to the surviving spouse, which can be particularly valuable if the surviving spouse’s own assets are expected to grow substantially.
Information and Documentation for the Election
The election is made by filing a complete U.S. Estate (and Generation-Skipping Transfer) Tax Return, Form 706. Filing this form is what makes the election official, as there is no separate form or checkbox to opt in.
Preparing Form 706 requires compiling a detailed inventory of the decedent’s assets and their fair market value at the date of death. This includes everything from real estate holdings and bank accounts to investment portfolios, business interests, and valuable personal property like art or collectibles. A special rule simplifies this process for estates filing only to elect portability, allowing the executor to provide good faith estimates for the value of assets that qualify for the marital or charitable deduction, rather than requiring formal appraisals.
The DSUE amount is calculated on Part 6 of Form 706. The process begins with the basic exclusion amount for the year of the decedent’s death. From this, you subtract the value of the decedent’s taxable estate, which includes assets passed to non-spousal heirs, and any lifetime taxable gifts made by the decedent. The portable DSUE amount is the lesser of the basic exclusion amount or this calculated unused exclusion.
The Process of Making the Election
The deadline for filing Form 706 is nine months after the decedent’s date of death. An automatic six-month extension is available by filing Form 4768, Application for Extension of Time To File a Return and/or Pay U.S. Estate (and Generation-Skipping Transfer) Taxes, on or before the original due date.
For estates not otherwise required to file, a simplified method for relief is available for missed deadlines. Under Revenue Procedure 2022-32, these estates can make a late election by filing Form 706 up to five years after the decedent’s death. To use this relief, the executor must write “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER SECTION 2010” at the top of the form, and this procedure does not require a user fee.
The completed Form 706 must be mailed to the IRS service center specified in the form’s instructions. The correct mailing address depends on the decedent’s state of residence and whether a payment is included with the return.
Utilizing the Deceased Spousal Unused Exclusion (DSUE)
Once the election is made, the DSUE amount is added to the surviving spouse’s own basic exclusion, creating a larger exemption. The surviving spouse can apply this combined exemption to taxable gifts made during their life or to their estate at death. When making a taxable gift, the DSUE amount is used first before the surviving spouse’s own exclusion.
A surviving spouse can only use the DSUE from their last deceased spouse. This is known as the “ordering rule.” If a surviving spouse with a DSUE amount remarries and their new spouse also dies, the DSUE from the first deceased spouse is lost and replaced by the DSUE from the most recent deceased spouse.
For example, a wife survives her first husband, who had a $4 million unused exclusion that was ported to her. She later remarries, and her second husband dies leaving no unused exclusion. The wife’s available DSUE from her first husband is replaced by the $0 DSUE from her second husband. The original $4 million DSUE is no longer available for her to use for her own gifting or estate tax purposes.