Portability and You

The increase in the federal estate and gift tax exemption amount to $15 million per individual ($30 million for married couples) grabbed most of the estate planning headlines last year when President Trump’s One Big Beautiful Bill Act" (OBBBA) was signed into law. Included in the OBBBA was a provision that made “Portability” permanent. Portability allows any unused portion of the first to die spouse’s estate and gift tax exemption (“DSUE”) to be carried over for use as an additional exemption amount by the estate of the second spouse to die. This means that if one spouse doesn’t use up their full exemption amount, the surviving spouse can add the unused portion to their own exemption amount when it comes to the surviving spouse’s estate tax liability. However, portability is not automatic. In order for the estate of a surviving spouse to later claim the unused exemption of the deceased spouse, the Executor of the estate must elect to use the deceased spouse’s unused exemption. To accomplish this, a timely federal estate tax return (a 706 return) must first be filed, even if there is no federal estate tax owed by the estate of the first spouse to die. Next, a check the box election has to be made in the filed 706 estate tax return to allow the surviving spouse’s estate to use all (or the unused portion) of the first spouse’s exemption. Wills prepared by Hill Wallack, LLP trusts and estates attorneys for married couples likely to have federal estate and gift tax exposure in the estate of the second to die spouse contain the following provision:

“I request that my Executor consider filing a federal estate tax return or other appropriate documents to enable the estate of my spouse to get the benefit of my unused exclusion amount as permitted by Internal Revenue Code Section 2010, as amended; and my Executor may make the portability election under Section 2010(c)(5)(A) even if it is unclear whether the estate of my spouse would benefit from the unused exclusion amount. No fiduciary shall be liable with respect to an election or non-election of tax exemption portability or the filing or non-filing of a federal estate tax return in connection therewith.”

Note that if a surviving spouse remarries, and their new spouse dies, the portability election from the first spouse is lost. The survivor can only use the unused exemption amount of their last deceased spouse. Good planning is still necessary since “Portability” only locks in the unused exemption amount at the time of the first spouse’s death. If assets that are passed to the surviving spouse grow significantly in value over time, that growth is fully subject to estate tax at the survivor’s death. So traditional planning techniques are still relevant, such as including a "credit shelter trust" to protect that appreciation from future taxes. However, there is no Portability for the Generation-Skipping Transfer (GST) Tax exemption which allows tax-free transfers to grandchildren and therefore traditional trust planning may still be needed.

Please contact a Hill Wallack, LLP trusts and estates attorney if you have questions about how federal estate and gift tax exemption Portability affects your current estate planning.

Author: Robert A. Stewart