Some duos were just made for each other – Simon and Garfunkel, Batman and Robin, Han Solo and Chewbacca. It’s hard to imagine one without the other because they bring out the best in each other. When it comes to the federal estate and gift tax, the same is true for portability and the Deceased Spouse’s Unused Exemption (DSUE) amount.
By way of background, the federal government imposes a gift and estate tax on transfers of wealth during life and upon death. Each person, however, has an exemption from gift and estate tax that they can apply to transfers of their wealth during life and at death. Currently, the exemption amounts is $12.92 million per person, which is historically very high. As you make gifts of your assets during life and upon death you start to use up that exemption. The good news is, some transfers don’t use any exemption. The most important of these exceptions are transfers to a spouse. Each person has the benefit of an unlimited marital deduction for transfers to a spouse.
Portability is a way for spouses to combine their exemption from estate and gift tax. Specifically, it’s the process where a surviving spouse can elect to pick up and use their deceased spouse’s unused estate tax exemption amount. The result is, the surviving spouse can use both his or her own exemption from estate and gift tax but also, the unused exemption of their deceased spouse.
Without portability, spouses who wish to leave all their assets to the survivor of them, could potentially face estate tax upon the death of the surviving spouse. This could happen when one spouse dies or gives all their assets to the other spouse, leaving all of their personal estate tax exemption unused because of the unlimited marital deduction. Under these circumstances, the surviving spouse would be left with the couple’s combined assets, but have only his or her own personal exemption to apply to avoid estate taxation. Enter portability. Portability allows the surviving spouse to pick up and use that unused exemption of the first spouse to die. The surviving spouse may end up with all the combined assets from both spouses but can shelter those assets from estate and gift tax by combining his or her own exemption and also the unused exemption of the deceased spouse – a combined exemption amount of $25.84 million in 2023.
Portability, however, is not automatic – it must be elected on a timely filed federal estate tax return, Form 706, after the deceased spouse’s death. The estate tax return is due within 9 months of the decedent’s death. While the IRS does provide certain procedures for a late-filed return to elect portability, it is best to make the election timely, within the 9-month deadline. If portability is not elected, the deceased spouse’s exemption is wasted and potentially an additional $12.92 would be subject to estate tax upon the last spouse to die. With the current estate tax rate of 40%, portability can save large estates of married couples up to $5.168 million in estate taxes.
Portability was intended to simplify estate planning for most married couples so that they could use both spouses’ exemptions without the need for more complicated estate planning at the first spouse’s death. For many couples, portability is a great tool for accomplishing their estate planning goals. For certain couples, however, it may not be the right fit because of certain other tax considerations like the generation-skipping transfer tax (GST Tax), or other family goals. If you have any questions about how portability impacts your estate plan, please contact us to schedule a consultation with an attorney with The Diamond Law Firm who can review your estate plan.