Portability of Estate Tax Exemption

Portability, enacted in 2010 and made permanent in 2013, allows a surviving spouse to use the deceased spouse's unused federal estate and gift tax exemption. This Deceased Spousal Unused Exclusion (DSUE) amount can significantly simplify estate planning for married couples while potentially doubling the amount that can pass tax-free to heirs.

How Portability Works

The DSUE Amount

The Deceased Spousal Unused Exclusion (DSUE) is the portion of the federal estate tax exemption that the first spouse to die did not use. The DSUE is calculated as:

DSUE = Basic Exclusion Amount - (Taxable Estate + Adjusted Taxable Gifts)

2025 and 2026 Exemption Amounts

Note: The One, Big, Beautiful Bill (OBBB), signed into law on July 4, 2025, permanently increased the basic exclusion amount to $15 million per taxpayer, preventing the scheduled 2026 sunset to pre-2018 levels.

Requirements for Portability Election

To elect portability, the following requirements must be met:

1. Decedent Must Be Survived by a Spouse: The election is only available for married decedents
2. Decedent Must Have Been a U.S. Citizen or Resident: Portability is not available for nonresident aliens
3. Timely Filing of Form 706: A federal estate tax return must be filed, even if no estate tax is due
4. Estate Must Affirmatively Elect Portability: The election is made by filing Form 706; there is no separate election form

Filing Requirements

Even if the estate is below the filing threshold (and no estate tax is due), Form 706 must be filed to elect portability. Important timing:

• Due Date: 9 months after death
• Extension: 6-month extension available if requested
• Late Filing: Special relief available for up to 5 years after death if certain conditions are met (Rev. Proc. 2022-32)
• Simplified Reporting: Estates filing solely for portability may use simplified asset valuation methods

The Last Deceased Spouse Rule

A critical limitation of portability is the last deceased spouse rule: a surviving spouse can only use the DSUE from their most recently deceased spouse.

How the Last Deceased Spouse Rule Works

If a surviving spouse remarries and the new spouse dies, the surviving spouse loses access to the DSUE from the first deceased spouse, regardless of whether a portability election was made for the second spouse.

Remarriage Scenarios (Dalton Example)

Consider the following scenario based on estate planning principles:

Example 1: Losing the First DSUE

• Spouse A dies in 2020 with a $5 million exemption. DSUE of $5 million elected for Surviving Spouse B.
• Surviving Spouse B remarries Spouse C.
• Spouse C dies in 2025 with a $13.99 million exemption. Spouse C used $8 million for lifetime gifts.
• Result: Surviving Spouse B now has access to Spouse C's DSUE ($5.99 million) but has LOST access to Spouse A's $5 million DSUE.

Example 2: Strategic Planning

• Before Spouse C's death in the above example, Surviving Spouse B could have made taxable gifts using Spouse A's DSUE
• Once used for lifetime gifts, the DSUE from Spouse A is "locked in" and cannot be lost
• This strategy requires proactive planning before the second spouse's death

Example 3: Second Spouse Survives

• Spouse A dies first; Spouse B remarries Spouse C
• If Spouse B dies before Spouse C, the last deceased spouse rule does not apply to Spouse C
• Spouse C never had access to Spouse A's DSUE (only spouses can receive DSUE from their own deceased spouse)

Practical Implications

Portability vs. Credit Shelter Trust

Despite portability's simplicity, credit shelter trusts remain valuable planning tools. Understanding when each approach is preferable is critical for CFP candidates.

Comparison Table

When Credit Shelter Trusts Are Preferred

1. Large Estates with Expected Growth: If the combined estate exceeds the exemption and is expected to grow, a CST shelters that growth from estate tax

2. States with Estate Taxes: Only Hawaii and Maryland recognize portability for state estate tax. In other states (Connecticut, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and D.C.), a CST can reduce state estate tax.

3. Blended Families: A CST ensures children from a prior marriage receive their intended inheritance, regardless of surviving spouse's actions

4. GST Planning: The Generation-Skipping Transfer (GST) exemption is NOT portable. A CST can be allocated the first spouse's GST exemption for dynasty trust planning.

5. Asset Protection Concerns: A CST can protect assets from the surviving spouse's creditors, lawsuits, or future spouse in a remarriage

6. Remarriage Risk: If the surviving spouse might remarry, the DSUE could be lost. A CST preserves the exemption regardless of remarriage.

When Portability Is Preferred

1. Simple Estates: Smaller estates where simplicity outweighs other considerations

2. Basis Step-Up Priority: When maximizing stepped-up basis at the second death is the primary goal (e.g., highly appreciated assets)

3. Surviving Spouse Needs Full Control: When restrictions on asset access are not desired

4. Cost Sensitivity: When clients want to avoid trust administration costs

5. No State Estate Tax: In states without estate tax or with portable exemptions

Combined Strategies

Sophisticated planning often combines portability with credit shelter trusts:

Clayton Election (Contingent QTIP)

A Clayton election allows a trust to be funded based on the executor's decision at the first spouse's death:

• If the executor makes a QTIP election, property goes to the marital trust
• If no election is made, property funds the credit shelter trust
• Provides postmortem flexibility to optimize based on actual circumstances

Disclaimer Planning

The surviving spouse can disclaim assets, which then fund a credit shelter trust:

• Disclaimer must be made within 9 months of death
• Provides flexibility without binding the surviving spouse

Portability Plus CST

Elect portability AND fund a credit shelter trust:

• CST preserves GST exemption
• DSUE provides backup exemption for surviving spouse's own assets
• Maximizes protection for larger estates

Portability for Non-Citizen Spouses

Portability has special rules for non-citizen surviving spouses:

• DSUE is NOT available unless assets pass to a QDOT
• Non-citizen spouse cannot use DSUE unless they become a U.S. citizen before dying
• If the surviving spouse becomes a citizen, the DSUE becomes available retroactively