Guide to Estate and Gift Tax Portability for Estate Planning
What is Portability for Estate and Gift Tax?
A common concern among our estate planning clients is whether taxes must be paid on their estate once they die. While there is no state-level estate tax in Alabama, your estate could be subject to federal estate taxes. In 2024, the federal estate tax exemption amount for an individual is $13.61 million (this is adjusted annually according to inflation and, as discussed later on may be subject to law changes in the future). In other words, if the value of the decedent’s estate is $13.61 million or less, the estate is exempt from the federal estate tax (subject to some exceptions including without limitation lifetime gifts that count against the exemption amount at death). An estate valued at more than $13.61 million will be subject to the federal estate tax, which means that any amount in excess of $13.61 million will be taxed anywhere from 18 to 40 percent, depending upon the amount in excess of $13.61 million.
In 2010, the IRS introduced the concept of estate tax portability, which, effectively, doubles the estate tax exemption amount for married couples. This means that if your spouse did not use the full $13.61 million exemption amount at his or her death, you may be able to transfer (“port”) your deceased spouse’s unused exclusion (DSUE) to yourself, increasing your own estate tax exemption amount.
How does Portability actually work?
Let’s look at some examples.
Scenario 1: In 2024, Phil dies a resident of Alabama with $6 million in his estate and his estate plan leaves everything to his loving wife, Claire.
In addition to the $6 million she just inherited from her husband, Claire also has her own assets worth $9 million. Claire now has $15 million in her estate! Therefore, when Claire dies, because her estate exceeds the $13.61 million estate tax exemption amount, the amount in excess of $13.61 million ($15 million – $13.61 million = $1.4 million) will be subject to the federal estate tax. In this case, Claire’s estate will be required to pay $505,800 in estate taxes at her death. That’s $505,800 that Phil and Claire’s three kids won’t inherit when Claire dies.
Scenario 2: In 2024, Phil dies a resident of Alabama with $14 million in his estate and leaves everything to his loving wife, Claire.
While we’ve already discussed the general rule that an individual will be taxed at any amount in excess of $13.61 million at his or her death, this second scenario demonstrates an exception to that rule reserved specifically for married couples. This exception is called the unlimited marital deduction (note that other requirements such as residency and citizenship must be met for a married couple to qualify for the unlimited marital deduction). This means that Phil can actually leave any amount in his estate to Claire without penalty. Therefore, although Phil’s estate plan left Claire an amount in excess of $13.61 million, because they are married, Phil’s estate is still exempt from paying the estate tax. In other words, because of the unlimited marital deduction, Phil’s estate is still considered to not have used his $13.61 allowable federal estate tax exemption amount, because his estate plan left everything to his spouse. (As the name suggests, the amount left behind to a surviving spouse has no limit as long as the married couple qualifies for the deduction.) While this may be great news for Phil’s estate, this will again leave Claire with an estate tax burden at her death. In this scenario, Claire does not have any assets of her own. At Phil’s death, Claire inherits $14 million from Phil, and her estate now totals $14 million. At Claire’s death, because her estate plan leaves everything she owns to Phil and Claire’s three kids, her estate will be required to pay estate taxes on the amount in excess of $13.61 million ($14 million – $13.61 million = $390,000). Claire’s estate will be required to pay $118,00 in taxes at her death.
So, how do we prevent this from happening in both of these examples? By using estate tax portability.
In both of the above scenarios, Phil didn’t use any of his $13.61 allowable estate tax exemption amount at his death. Regardless of the amount he leaves to his wife Claire, it will never be taxed because of the unlimited marital deduction. In both scenarios, Phil’s estate is considered to have never touched his $13.61 million. The concept of portability allows Claire to apply Phil’s unused estate tax exemption amount (DSUE) (in both of these cases, $13.61 million) to her own exemption amount. Therefore, Claire can add $13.61 million to her individual estate tax exemption amount, bringing her total estate tax exemption amount to $27.22 million. This means that any amount in Claire’s estate in excess of $27.22 million at her death would be subject to the estate tax. Because Claire’s estate did not exceed that value in either scenario, her estate will not be required to pay taxes at her death in either case.
In short, because Phil’s estate plan left the entirety of his estate to his wife Claire, he didn’t use any of his estate exemption amount at his death. His unused exemption amount (DSUE) remained at $13.61 million. Because Phil did not use any of his allowable estate tax exemption amount at his death, Claire is entitled to use Phil’s entire unused portion ($13.61M) for herself and her estate.
How do I elect portability?
File IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return.
Recall that at Phil’s death, his estate was not required to pay taxes. Claire, therefore, did not file an estate tax return (Form 706) on behalf of Phil’s estate, because she correctly assumed that doing so wasn’t necessary. However, if Claire wants to transfer Phil’s unused exclusion amount to herself, she nevertheless needs to file the return anyway. This will allow Claire to make that portability election, ultimately providing herself with the opportunity to increase her estate tax exemption amount by $13.61 million, as discussed above.
In short, Claire should still file Form 706 regardless of the size of Phil’s estate so that she can elect to transfer Phil’s deceased spousal unused exclusion (DSUE) amount to herself.
How much time do I have to file an estate and gift tax return to make a portability election?
Typically, if an estate tax return is necessary, you will have nine months from the date of the deceased person’s death to file that return. Fortunately, the IRS has made an exception for couples like Phil and Claire – that is, estates that aren’t required to pay taxes, but may still need to be filed for purposes of claiming portability. If you are not otherwise required to file an estate tax return but are choosing to do so to make a portability election, you will have five years from the date of your spouse’s death to file that return. If you are outside of the five year time window and need to file an estate tax return to claim portability, we recommend that you speak with an attorney because there may be other avenues available to you.
Claire has five years from the date of Phil’s death to make a portability election.
Do I lose the portability election if I get remarried?
Not necessarily. The general rule is that the portability election is only available for your most recently deceased spouse.
After Phil’s death, Claire grieves for an appropriate amount of time before she decides to get remarried to Phil’s biggest rival in the realtor business, Gil. Can Claire still use Phil’s DSUE of $13.61 million for herself? It depends.
Since Phil was the spouse who most recently predeceased her, she is still able to apply his $13.61 million DSUE amount for herself. However, say only a few months after getting married to Claire, Gil also passed away leaving Claire widowed once again. At Gil’s death, he decided to leave everything in his estate to his friend Gloria. In doing so, he used up his entire $13.61 million federal estate tax exemption amount.
Now, Claire’s most recently deceased spouse is Gil, not Phil. This means that she is no longer entitled to apply Phil’s $13.61 million exclusion amount to herself at her death, and she must use Gil’s. Unfortunately for Claire, because Gil used his entire estate tax exemption amount at his death, there is no excess exclusion amount in Gil’s estate to add to Claire’s estate.
To summarize, the act of remarriage does not automatically cause an individual to lose his or her deceased spouse’s unused exclusion amount; however, that DSUE could potentially become lost if your second spouse also predeceases you. You are only entitled to use the DSUE from your most recently deceased spouse.
Should I even be concerned about estate tax portability if I am not near the $13.61 million limit?
While you may be thinking this doesn’t apply to you because your estate is less than $13.61 million, it’s important to keep in mind that Congress currently intends to significantly lower that exemption amount in the near future. Starting in 2026, the new exemption amount for an individual will be $5 million (adjusted for inflation).
It’s also important to keep in mind that making gifts during your lifetime can potentially lower your overall exemption amount.
Key Takeaways
- Alabama does not have a state level estate tax.
- Portability is NOT automatic. The surviving spouse must actually file Form 706 estate and gift tax return within five years of the first spouse’s death – regardless of the size of his or her estate – in order to take advantage of the deceased spouse’s unused exclusion amount (DSUE).
- Subject to qualification, the unlimited marital deduction allows spouses to leave any amount – even if it exceeds $13.61 million – to their surviving spouse without penalty.
- Remarriage could potentially have an impact on how much portability you can claim, as you are only entitled to use the DSUE amount from your most recently deceased spouse.
- Although you may not have concerns about estate taxes right now because your estate is not valued near $13.61 million, keep in mind that that limit will be lowered to $5 million beginning January 1, 2026.
This article is for educational purposes only and contains hypotheticals and generalized rules that have been simplified for purposes of explanation. Qualification for certain tax treatment and the field of tax law in general is complicated. Failing to take advantage of favorable tax code provisions or incurring penalties and interest for failing to report can be very costly. As always, you should consult with an attorney regarding the topics discussed in this blog.
If you would like our help with estate planning, please call us at (251) 215-9275 or write us on the contact page.