Portability helps minimize federal gift and estate taxes by allowing a surviving spouse to use a deceased spouse’s unused gift and estate tax exemption amount. Currently, the exemption is $12.06 million, but it’s scheduled to return to an inflation-adjusted $5 million on January 1, 2026. Some lawmakers have proposed lowering the amount even further.

Portability isn’t automatically available; it requires the deceased spouse’s executor to make a portability election on a timely filed estate tax return. Unfortunately, many estates fail to make the election because they’re not liable for estate tax and, therefore, aren’t required to file a return. These estates should consider filing an estate tax return for the sole purpose of electing portability. The benefits can be significant, as the following example illustrates.

Bob and Carol are married. Bob dies in 2022, with an estate valued at $3.06 million, so his unused exemption is $9 million. His estate doesn’t owe estate taxes, so it doesn’t file an estate tax return. Carol dies in 2026, with an estate valued at $15 million. (For this example, let’s say the exemption amount in 2026 is $6 million.) Because the exemption has dropped to $6 million, her federal estate tax liability is $3.6 million [40% x ($15 million – $6 million)].

Had Bob’s estate elected portability, Carol could have added his $9 million unused exemption to her own for a total exemption of $15 million, reducing her estate tax liability to zero. Note that by electing portability, Bob’s estate would’ve locked in the unused exemption amount in the year of death, which wouldn’t be affected by the reduction in the exemption amount in 2026.

If your spouse died within the last couple of years, and you anticipate that your estate will owe estate tax, consider having your spouse’s estate file an estate tax return to elect portability. Ordinarily, an estate tax return is due within nine months after death (15 months with an extension), but a return solely for purposes of making a portability election can usually be filed up to two years after death.

© 2022

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