Portability has been available since 2011. In estate planning, the concept of portability refers to the ability of a surviving spouse to use the unused portion of their deceased spouse’s federal estate tax exemption. The federal estate tax is a tax on the transfer of property at death, and each individual has an estate tax exemption, which is the amount of assets that can be transferred without incurring estate tax. In 2023 this personal estate tax exemption is $12.92 million.
Assume you are very wealthy, and your spouse inherits most of your assets, but assume, in addition, you bequeath or gift a total of $5 million to persons other than your spouse. In that case, your remaining or unused estate tax exemption would be reduced by $ 5 million to $ 7.92 million at the time of your death. This is often called the Deceased Spousal Unused Exclusion (DSUE).
In the past, if a spouse died without using their full estate tax exemption, the unused portion was lost. However, under current law, if a spouse dies and has not used their full estate tax exemption, the unused amount can be transferred to the surviving spouse through portability. This means that the surviving spouse can add the unused portion of their deceased spouse’s exemption to their own exemption.
Assume you pass away, and the DSUE is $7.92 million. As in our example above, $7.92 million would be added to your surviving spouse’s exemption, increasing it from $12.92 million to $ 20.84 million. In other words, when your surviving spouse dies, no estate tax is due unless his or her estate exceeds $ 20.84 million.
Now for the effect of the unlimited marital deduction. The unlimited marital deduction is a provision in the US estate tax law that allows a married individual to transfer an unlimited amount of assets to their spouse, both during life and at death, without incurring any federal estate or gift taxes. This means that when one spouse passes away, he or she can leave all their assets to their surviving spouse without any tax consequences at that time.
Going back to our initial example. If the first spouse had made transfers of wealth during his or her lifetime or at death only to her spouse, he or she would not have reduced her personal estate tax exemption of $12.92 million because a married individual can transfer an unlimited amount of assets to their spouse without incurring any estate taxes. This means that when the surviving spouse dies, because of portability (see above), his or her estate tax exemption is $12.92 million multiplied by two or $25.84 million.
Importantly, portability is not automatic. For the surviving spouse to benefit from the decedent’s unused exclusion amount (DSUE) through portability, the estate’s representative must ensure the timely filing of an estate tax return (Form 706).
Now, these examples are oversimplifications, and, for example, substantial gifts can be made that do not count against the gift and estate tax exclusion. Please see also our previous posts about gifts.
However, the current gift and estate tax exclusion amount established in 2017 is historically at a very high level. By the end of 2025, the present exemption amount for estate and gift tax is planned to sunset. After that, the exemption amount will revert to the prior law’s limit of $5 million, projected to be approximately $6.2 million when adjusted for inflation. Moreover, the highest rate of gift and estate tax, which is 40%, is anticipated to rise to 45% in 2026. If this happens, couples with a current net worth of approximately $ 10 million and higher need to think now about advanced estate planning techniques that reduce their potential estate tax liability. This will be the subject of a subsequent post.
