What Is Portability in Gift and Estate Taxes?
Portability lets a surviving spouse use a deceased spouse's unused gift and estate tax exemption, but this valuable benefit requires a timely election.
Portability is a federal tax provision permitting a surviving spouse to use the unused portion of their deceased spouse’s estate and gift tax exemption. This allows for the transfer of tax benefits between spouses, providing flexibility in estate planning. The goal is to ensure the full value of both exemptions can be used, shielding more assets from federal estate and gift taxes when the second spouse passes away.
The Core Concepts of Estate Tax and Exemption
The federal estate tax is a tax on the transfer of a person’s assets to their heirs after death. A component of this system is the lifetime gift and estate tax exemption, which is a specific amount of assets an individual can give away during their lifetime or at death without incurring federal tax. For 2025, the exemption amount is $13.99 million per individual, though this amount is scheduled to be reduced at the end of 2025 unless Congress extends it.
When a person dies without using their full exemption, the remainder is the Deceased Spousal Unused Exclusion (DSUE). This is the value that can be ported to the surviving spouse. The DSUE is calculated by subtracting the value of the deceased’s taxable estate and lifetime taxable gifts from their total exemption amount.
Portability of the DSUE is not automatic and requires an election by the deceased’s estate; if no election is made, the unused exemption is lost. The surviving spouse can add this ported DSUE amount to their own exemption, creating a larger shield against future gift or estate taxes.
Information Required for the Portability Election
To make the portability election, the executor of the deceased’s estate must file Form 706, the United States Estate Tax Return. This filing is required even if the estate’s value is below the normal filing threshold and no tax is owed. The form’s purpose in this situation is to formally calculate and report the DSUE amount being transferred to the surviving spouse.
The executor must compile an inventory of the decedent’s assets and determine their fair market value as of the date of death. This includes items like real estate, bank accounts, and investments. A complete record of any taxable gifts made by the deceased during their lifetime is also needed.
After all assets are valued and lifetime gifts are accounted for, the executor calculates the DSUE amount on Form 706. This calculation involves subtracting the value of the taxable estate from the basic exclusion amount for the year of death.
The Filing Process for Electing Portability
The standard deadline for filing Form 706 to make the portability election is nine months after the decedent’s date of death. An automatic six-month extension can be obtained by filing Form 4768.
The IRS offers a simplified method for estates not otherwise required to file an estate tax return. Under Revenue Procedure 2022-32, these estates can file Form 706 to elect portability up to five years after the decedent’s death, providing a large window for spouses to claim the DSUE.
The completed Form 706 can be submitted to the IRS by mail to the address specified in the form’s instructions or through an authorized e-file provider.
Application of the Ported Exemption by the Surviving Spouse
The ported DSUE amount is added to the surviving spouse’s own lifetime exemption, creating a larger, combined total. The surviving spouse can apply this combined amount to reduce or eliminate the tax on any taxable gifts they make during their lifetime.
If the surviving spouse does not use the DSUE for lifetime gifts, the full amount can be applied against their own estate at death. This can reduce or eliminate the federal estate tax liability for their heirs. For example, a spouse with their own $14 million exemption and a ported DSUE of $9 million can shield a total of $23 million in assets from estate tax.
A rule to understand involves remarriage. A surviving spouse may only use the DSUE from their most recently deceased spouse. If a surviving spouse with a ported DSUE amount remarries and their new spouse also dies, the DSUE from the first deceased spouse is lost. It is replaced by the DSUE from the second deceased spouse, if a portability election is made for that estate.