Portability between spouses

In short

A friend of mine lost her husband last spring, and the paperwork that followed felt heavier than the grief. If you are married and your estate is large, one small filing can save a family a great deal of tax. The federal estate tax exemption is the amount each person can pass on without federal estate tax, and right now it is the current figure, which the official source publishes each year. When a spouse dies, the survivor may be able to add the unused part of that exemption to their own. That is called portability. The estate has to ask for it by filing a federal estate tax return, called Form 706, on time. For a couple with a very large estate, skipping that filing can cost millions of dollars, as the worked example shows. It does not happen on its own.

The whole of it

What it is

I once watched a neighbor leave a good tool out in the rain because he figured he would get to it later. Portability works a bit like that. The tool is a very valuable one, and it spoils if nobody picks it up in time.

Every person has a lifetime federal exemption from estate and gift tax. It is a set amount that can pass tax free, and it is the current figure, which the official source publishes each year today. Congress sets it, and it can change. Married couples often leave everything to the surviving spouse, and that transfer carries no federal estate tax because of the unlimited marital deduction. That deduction lets a spouse who is a U.S. citizen inherit any amount tax free. The first spouse's own exemption can then go unused.

Portability fixes that. It lets the survivor claim the deceased spouse's unused exemption, known as the DSUE amount. DSUE stands for deceased spousal unused exclusion. The survivor then has their own exemption plus that extra amount. Congress put this into the law in 2010, and it is described in Section 2010(c) of the Internal Revenue Code.

A family with real wealth should care, because the survivor's estate may be far larger than one exemption. You have probably wondered whether you are doing right by your family. This is one of the cleaner ways to say yes.

How it works

You may think the extra exemption just shows up when someone dies. It does not. The executor of the first spouse's estate has to file Form 706 and elect portability on it. The executor is the person named to settle the estate. If no one is appointed, the person in charge of the deceased's property may file instead.

The return is due nine months after death. The estate may ask for a six month extension. The IRS has also issued a procedure, Revenue Procedure 2022-32, that gives a later window for estates that were not otherwise required to file. That window is the current figure, which the official source publishes each year years after the date of death. The IRS explains the details on its Form 706 page and in the form's instructions. A late election only works for an estate that was not otherwise required to file, so a large estate that must file cannot count on it.

Two limits matter. First, the DSUE amount belongs only to the most recent deceased spouse. If a survivor remarries and the new spouse also dies, the old DSUE can be lost. Second, DSUE covers the federal estate and gift tax only. It does not cover the generation skipping transfer tax, which is a separate tax on gifts to grandchildren and others two or more generations down. Each person's generation skipping exemption cannot be passed to a spouse.

The IRS may also look at the first spouse's return when the survivor later uses the DSUE. So the return has to be done with care. The IRS may examine the numbers behind the DSUE amount when the survivor uses it, and how that works alongside the time limits on the first estate is a question for an estate lawyer.

The numbers, and where to find yours

The basic exemption is the current figure, which the official source publishes each year. The top federal estate tax rate is the current figure, which the official source publishes each year percent. Both come from the IRS and the Internal Revenue Code, and the IRS posts the yearly figures on its estate tax page.

Your own numbers sit in a few places. The DSUE amount is worked out on Form 706, and the form's instructions on the IRS website show which part to use. The deceased spouse's taxable gifts over a lifetime appear on prior gift tax returns, called Form 709. The date of death value of every asset, listed on Form 706, drives the result. An appraiser, an accountant, or an estate lawyer can help gather these. A careful family keeps a copy of the filed return and the IRS letter that confirms it. The survivor may need both decades from now.

Check your state, too. Some states tax estates at much lower levels than the federal government, and those states generally do not offer portability. A state exemption that goes unused is usually lost. That is a separate question for a local lawyer.

A worked example

A friend of mine told me about a couple I will call Harold and Margaret. Harold was an engineer who built a manufacturing company. Margaret kept the books and kept him honest. Their combined wealth was $60 million.

Harold died first. He left everything to Margaret, so no federal estate tax was due. Suppose the exemption at that time was $13 million. Harold used none of it, so $13 million sat unused. His estate did not owe tax, so he is the kind of case where families skip the filing.

Margaret's estate started at $60 million, and it grew to $70 million by the time she died. Suppose the exemption then was still $13 million. Without portability, only her own $13 million shielded her estate. The taxable part would be $70 million minus $13 million, which is $57 million. At a rate of 40 percent, the tax would be $57 million times 0.40, which is $22.8 million.

Now suppose Harold's executor had filed Form 706 and elected portability. Margaret would then hold her own $13 million plus Harold's $13 million of DSUE, for $26 million in all. The taxable part would be $70 million minus $26 million, which is $44 million. The tax would be $44 million times 0.40, which is $17.6 million.

The difference is $22.8 million minus $17.6 million, or $5.2 million. That is $13 million times 40 percent. One filing, done on time, was worth $5.2 million to their children. The executor did not need to be clever. Remembering was enough.

Where it goes wrong

I have seen good people make a plain mistake because no one told them it mattered. The most common one is not filing. A family hears that no tax is due, so it files nothing. That is the one case where filing matters most.

Another trap is missing the deadline. A large estate that must file cannot lean on the later window. A third is remarriage. If the survivor marries again and the new spouse dies first, the earlier DSUE may vanish. Careful planning around gifts can help, and an estate lawyer can explain how.

Some families rely on portability alone and skip other tools, like trusts that use the first spouse's exemption directly. Portability does not grow with the assets. A trust can hold the exemption amount outside the survivor's estate, along with later growth. That growth matters at this level of wealth. Portability also does not shield the generation skipping exemption, as noted above. And Congress can change the exemption, so a figure fixed in the law today may not last.

Last, there is the matter of records. The IRS can check the first return years later. Missing appraisals or messy asset lists make that painful. Keep it tidy.

Questions to answer before you leave this page

Have you and your spouse talked about who will serve as executor, and does that person know the return has to be filed? Does your family know the date of death starts a nine month clock? Have you gathered your gift tax returns and your asset records in one place? Do you live in a state that taxes estates at a lower level, and have you asked a local lawyer what that means for your family? Would a trust that uses the first spouse's exemption directly suit your situation better than portability alone? And if the survivor remarries, who will check what happens to the unused amount?