For married couples, estate tax planning is an essential part of protecting and preserving wealth for future generations. One of the most powerful tools available is the federal estate tax portability provision. Portability allows a surviving spouse to use any unused portion of the deceased spouse’s federal estate tax exemption, potentially shielding millions of dollars in assets from estate taxes. However, taking advantage of portability requires advance planning and timely action.
Understanding how portability works—and how to incorporate it into your estate plan—can make a significant difference in your family’s long-term financial health.
What Is Portability in Estate Tax Planning?
Portability refers to the ability of a surviving spouse to inherit the unused portion of their deceased spouse’s federal estate tax exemption. This concept was introduced in 2011 and made permanent by the American Taxpayer Relief Act of 2012. It simplifies estate tax planning for many couples by allowing them to combine their exemptions without the need for complex trust structures.
For 2024, the federal estate tax exemption is $12.92 million per person. This means that a married couple could potentially shield up to $25.84 million from federal estate taxes if they fully utilize portability.
How It Works in Practice
Suppose one spouse dies in 2024 and uses only $5 million of their $12.92 million exemption. The surviving spouse can elect to preserve the remaining $7.92 million and add it to their own exemption. If the surviving spouse passes away years later, their estate could be protected up to the combined amount of their personal exemption plus the unused amount from their spouse.
The key to this strategy is filing a timely federal estate tax return (Form 706), even if the deceased spouse’s estate is not otherwise required to file one. This must be done within nine months of death (or 15 months with an extension) to claim portability.
Benefits of Portability for Married Couples
1. Maximizes Tax-Free Transfers
Portability allows couples to effectively double the amount they can pass on to heirs tax-free, which is especially important for high-net-worth families. Without portability, any unused exemption from the first spouse to die is lost.
2. Reduces the Need for Complex Trusts
Before portability, many couples used credit shelter trusts or bypass trusts to preserve the exemption of the first spouse. While those trusts can still be useful in certain situations, portability allows for a simpler structure that may better suit modern families.
3. Offers Flexibility
Portability allows couples to delay complex estate planning decisions until after the death of the first spouse. This flexibility can be especially helpful when the size of the estate, family dynamics, or tax laws are uncertain.
When Is Portability Not Enough?
While portability is a powerful tool, it’s not a one-size-fits-all solution. There are several reasons a married couple may still want to use traditional estate planning tools alongside portability:
1. State Estate Taxes
New York, for example, does not recognize portability for state estate tax purposes. The current New York estate tax exemption is $6.58 million (as of 2024), and any estate exceeding that amount may be taxed at rates up to 16%. Couples must still plan carefully to minimize exposure to state-level taxes.
2. Asset Protection
Portability does not protect assets from creditors, remarriage of the surviving spouse, or poor financial decisions. A credit shelter trust, on the other hand, can offer asset protection that portability cannot provide.
3. Future Appreciation of Assets
When assets are left directly to the surviving spouse, any growth in value after the first spouse’s death is included in the surviving spouse’s estate. With a bypass trust, that appreciation is kept out of the taxable estate.
4. Remarriage
If the surviving spouse remarries and their new spouse also dies, only the most recent deceased spouse’s unused exemption can be claimed. That means earlier unused exemptions could be lost.
When Should You Use Portability?
Portability is especially useful when:
- The estate is below the exemption amount but may grow significantly in the future
- Simplicity and flexibility are preferred over more complex trust-based planning
- One spouse passes away unexpectedly and no prior trust plan was in place
- Asset protection is not a significant concern
It’s important to work with an estate planning attorney and tax professional to determine whether portability is the right strategy for your situation.
Act Quickly to Preserve the Benefit
The IRS requires the estate of the deceased spouse to file a federal estate tax return (Form 706) in order to elect portability—even if no estate tax is due. Failing to file this return on time results in losing the unused exemption forever. Filing Form 706 is a critical step, and many families overlook it after the death of a spouse.
Speak to an Attorney
Contact the Law Offices of Juliet Cohen, P.C. for advice on estate planning. Our experienced attorneys can help you develop a personalized plan that safeguards your assets and provides for your family’s future.
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