For 2026, the federal gift and estate tax exemption is $15 million. That's effectively $30 million for a married couple, assuming both spouses' exemptions are available. (For 2027 and beyond, the exemption will be adjusted annually for inflation.)
If the dollar value of your taxable estate exceeds the exemption, your estate will get hit with a federal estate tax bill of 40% of the excess. With such a generous exemption in play, though, you may think you have nothing to worry about. However, if you're married, there's a key estate planning point to keep in mind: preserving the "portability" of your and your spouse's exemptions.
Many married couples are unaware that, when one spouse dies, any unused portion of the deceased spouse's gift and estate tax exemption is portable. That is, it can be transferred to the surviving spouse if 1) the deceased spouse was a U.S. citizen or resident, and 2) the executor of the deceased spouse's estate makes a valid portability election by timely filing a properly completed federal estate tax return. (The election is generally made by filing the return; an executor who doesn't want to elect portability must affirmatively opt out on the form.)
Portability creates a valuable wealth management opportunity for married couples. Thanks to the unlimited marital deduction, you can generally leave everything to your surviving spouse without incurring estate tax liability or using up any of your exemption, as long as your surviving spouse is a U.S. citizen. Assuming that's the case, taking advantage of the unlimited marital deduction and the portable exemption can put a surviving spouse into a favorable tax position.
For example, let's say you pass away in 2026 without having used up any of your $15 million exemption on lifetime gifts. You could leave your unused exemption to your surviving spouse, who'd then have a $30 million exemption to work with. In other words, he or she could give loved ones, such as your adult children, up to $30 million in gifts while alive or bequests at death, free of gift or estate taxes.
Now you may think there's no reason to instruct an executor to timely file a properly completed estate tax return if neither you nor your spouse is wealthy enough to exceed your respective $15 million exemptions. But it's better to be safe than sorry.
Say you pass away in 2026 with a $3 million estate. Thanks to your $15 million exemption, you leave the $3 million to your adult children without incurring any federal estate tax. And because you planned ahead, your executor follows your instructions to timely file a properly completed estate tax return, making the portability election and passing along your $12 million unused exemption ($15 million minus $3 million) to your surviving spouse.
In 2027, your spouse, an avid investor, collects $25 million (after capital gains tax) in a windfall stock sale. However, he or she passes away later that year, leaving a $27 million estate in total. Let's say the inflation-adjusted exemption for that year is $15.5 million, so your spouse's estate then has a $27.5 million exemption to work with — his or her $15.5 million exemption plus your unused $12 million exemption passed along via the portability election. That completely shelters your spouse's estate from estate tax liability.
If your executor hadn't made the portability election, your spouse's estate would have had only a $15.5 million exemption. The resulting federal estate tax bill would have been $4.6 million — 40% times ($27 million minus $15.5 million). As you can see, you should always instruct your executor to make the portability election, because you never know what might happen.
Let's consider another, more imaginative example. Say you pass away in 2026 with a $2 million estate. Thanks to your $15 million exemption, you leave the $2 million to your adult children without incurring any federal estate tax. Per your instructions, your executor timely and properly files your estate tax return, making the portability election and passing along your $13 million unused exemption ($15 million minus $2 million) to your surviving spouse.
Four years later, in 2030, your spouse passes away with an estate worth $5 million. But suppose Congress has reduced the exemption to only $2 million for 2029 and beyond — with a 60% tax rate on the dollar value of estates exceeding the exemption. On the bright side, in this fictitious example, Congress has also retained the portability exemption rules. So, your spouse's estate has a $15 million exemption to work with (the $2 million exemption plus your unused $13 million exemption passed along via the portability election). That completely shelters your spouse's estate from estate tax liability.
Again, if your executor hadn't made the portability election to pass along your $13 million unused exemption to your spouse, the exemption available to your spouse would have been only $2 million. In turn, under the terms of our imaginary scenario, your spouse would have had a federal estate tax bill of $1.8 million — 60% times ($5 million minus $2 million).
To make the point of this hypothetical example abundantly clear: No one knows what twists and turns estate tax law may take in the future. Congress could change the rules at some point, which is why the portability election should always be made if available.
Instructing an executor to make the portability election following your or your spouse's passing is particularly important if you're already wealthy enough to potentially exceed the exemption. Say you pass away in 2026 with a $10 million estate. You leave the entire amount to your adult children without incurring estate taxes, thanks to your $15 million exemption.
Your estate's executor makes the portability election to pass along your $5 million unused exemption ($15 million minus $10 million) to your spouse, who has an estate worth $20 million. If your spouse also dies this year, he or she can leave the $20 million to heirs estate-tax-free because of the $20 million exemption (your spouse's $15 million exemption plus your unused $5 million exemption).
If your executor failed to make the portability election to pass along your unused $5 million exemption, your spouse's estate would have only a $15 million exemption. As a result, his or her estate would face a federal estate tax bill of $2 million — 40% times ($20 million minus $15 million).
To make the portability election, an estate's executor must file a properly completed federal estate tax return, IRS Form 706, no later than nine months after the date of the first spouse's death. If the executor is unable to file Form 706 by the general due date, an automatic six-month extension of time to file can be obtained by filing Form 4768.
In the event the deceased spouse's estate wasn't otherwise required to file Form 706 and missed the regular deadline, the executor may be able to use a simplified IRS relief procedure. This involves filing a properly completed Form 706 on or before the fifth anniversary of the deceased spouse's death, as well as including a required Revenue Procedure 2022-32 statement at the top of the return.
It's critical for your executor to fulfill both the "timely" and "properly completed" requirements of filing an estate tax return. In a recent U.S. Tax Court decision, Estate of Rowland v. Commissioner, an estate got hit with a $1.5 million additional federal estate tax bill because the estate wasn't allowed to use the first spouse's unused exemption. Why? The Form 706 for the first spouse's estate wasn't filed on time or properly completed.
There were several more specific reasons for the failure, but the point is that an executor must properly complete Form 706 and file it within one of the allowable timing windows to make the portability election. If that doesn't happen, the surviving spouse's estate loses the deceased spouse's unused exemption — and that can be costly.
Portability can be a powerful estate planning tool, but it isn't automatic. Even when an estate is unlikely to owe estate tax after the first spouse's death, filing a timely and properly completed Form 706 is key to preserving any unused exemption for the surviving spouse. If you're married, be sure to discuss portability with your estate planning and tax advisors — and make extra sure that your executor understands when and how to make the election.
Get in touch today and find out how we can help you meet your objectives.
