Portability, an Often Overlooked Way to Save Estate Tax for Married Couples

We begin by understanding that every US person has a lifetime allowance for the transfer of wealth (either during lifetime or at death).  This allowance is the Applicable Exemption Amount, but we will refer to it here as the lifetime exemption.   In 2021, the lifetime exemption is $11.7 million.  The lifetime exemption is indexed for inflation and usually increases annually.

However, at the time this was written, there were proposals in Congress to return the lifetime exemption to its 2011 level of $5.0 million (adjusted for inflation).   This reduction and the ability to transfer wealth without incurring transfer tax (gift or estate tax) would significantly change the landscape for wealth transfer planning.  This has since been removed, however, with all the back and forth tax legislation, we are still recommending that you stay the course with estate planning.

This brings us to the question, what is Portability?  And how can we use this fairly new technique to minimize or eliminate transfer taxes?  

Portability came into the law with the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010, and was introduced as a temporary measure set to expire at the end of 2012.  The American Taxpayer Relief Act of 2012 made the law permanent.

Before Portability each taxpayer had their own discrete lifetime exemption.  So for example, take our taxpayers, Fred and Ethel, in 2011 each have their own individual lifetime exemption of  $5.0 million.    Fred has an estate valued at $3.0 million and Ethel has an estate valued at

 $7.0 million.   If Fred was the first to die, he would have unused exemption of $2.0 million.   If his executor elected Portability, his estate would ”port” or transfer his unused exemption to add to Ethel’s $5.0 million lifetime exemption.  Ethel would in that moment have a new lifetime exemption of $7.0 million.   Without Portability Fred’s unused lifetime exemption would have been wasted.  At Ethel’s death she would have Fred’s DSUEA (Deceased Spouse Unused Exemption Amount) plus her own lifetime exemption.

And if Ethel made taxable gifts after Fred’s death, the DSUEA received from Fred would be exhausted first, before reducing her lifetime exemption.  If Ethel remarried and husband number two pre-deceased her, Fred’s DSUEA would be lost to her.   Ethel is entitled to the DSUEA of her most recently deceased spouse.  However, if Ethel divorced spouse number two, and she died before he did, Fred would still be considered Ethel’s most recent deceased spouse. 

To obtain the benefits of Portability, an election has to made with the Internal Revenue Service.    The election for Portability is made by filing a Form 706, United States Estate (and Generation-Skipping Transfer) Tax return.  The Form 706 must be timely filed, that is nine months after date of death, (or within 15 months from date of death if a six-month extension was timely filed) by the executor of the decedent’s estate.  

If an executor is filing a Form 706, for Portability, ie., a return which would not otherwise be filed because the value of the decedent’s gross estate is below the decedent’s lifetime exemption, the IRS does permit the estimation of asset values to be reported, provided those estimates are in good faith and due diligence can be demonstrated.

Since the introduction of Portability and because of its utility, many estates have wanted to make the election.  But were precluded from doing so, because the nine-month filing window (of within 15 months with a timely filed extension) had closed.  In response to demand for late filing relief for estates not otherwise required to file Form 706, and to eliminate the need to petition the IRS by Private Letter Rulings (a significant user fee required), the IRS issued Revenue Procedure 2017-34 which provides for an additional extension of time to file to the second anniversary of the decedent’s death, for decedents dying after January 2, 2016. 

If the surviving spouse is a non-US citizen, the DSUEA can become available the non-citizen surviving spouse, when that surviving spouse becomes a U.S. citizen (provided the executor of the most recent deceased spouse made a Portability election).  Special rules apply to a Qualified Domestic Trust (QDOT), which permit a marital deduction for trust assets benefitting a non-citizen surviving spouse.

With the lifetime exemption in jeopardy of being reduced by current proposals in Congress or the 2025 roll back already on the books, married couples, surviving spouses and their advisors should not overlook this technique to maximize the utility of a married couple’s combined lifetime exemptions, and thereby eliminate the need to pay gift or estate taxes on wealth transfers, which could be transferred tax free.  Portability has the potential to simplify estate planning considerations for moderately wealthy couples.