If you are married and have a sizable estate, there is a tax-saving strategy to take advantage of that could benefit you and your heirs. The strategy is called portability and allows your personal representative to transfer your unused estate tax exemption to your surviving spouse. While this strategy could significantly reduce or eliminate the federal estate tax liability for your combined estates, it is not automatic and has some limitations and drawbacks. In this article, Boulay’s Estate and Trust team explain portability, how it works, and what you need to know about its advantages and disadvantages.
What is Portability or DSUE?
Portability, or DSUE (Deceased Spouse Unused Election), is a federal estate tax provision that allows a surviving spouse to capture any unused estate tax exemption and credit from their deceased spouse. The surviving spouse can effectively double their estate tax exemption, which, for 2024, is $13.61 million per person. For example, if the first spouse dies and utilizes $5 million of their exemption, they have $8.61 million of unused exemption that can be transferred to the surviving spouse. The surviving spouse then adds this amount to their own exemption, resulting in a total exemption of $22.22 million.
Why Elect into Portability?
Electing into portability can provide significant benefits for the surviving spouse and their beneficiaries, especially if the value of their estate is expected to appreciate over time. By electing into portability, the surviving spouse can preserve the unused exemption of the first spouse and use it to reduce or eliminate their own estate tax liability when they die. The result can have substantial tax savings and wealth preservation for the family. Additionally, electing into portability provides more flexibility and simplicity for the surviving spouse, as they may not have to create complex trusts or retitle assets to take advantage of the unused exemption. They can also use the portability election to make transfers during their lifetime. A seasoned estate and trust planning team can help you discern the best steps for you and your family.
What are the Pitfalls of Missing the Portability Election?
Missing the portability election can have serious drawbacks for the surviving spouse and their heirs, especially if the value of their estate exceeds the individual exemption amount. If the surviving spouse does not elect into portability, they will lose the unused exemption of the first spouse and will only have their own exemption to shield their estate from taxes. This can result in a higher estate tax bill and less wealth transfer to the beneficiaries. Moreover, missing the portability election can limit the options and opportunities for the surviving spouse, as they may have to create trusts or restructure their assets to minimize their estate tax exposure.
How to Elect into Portability?
Electing into portability is not automatic. The estate personal representative must file a timely and complete estate tax return (Form 706) for the deceased spouse, even if no estate tax is due. The estate tax return must be filed within nine months of the date of death unless a six-month extension is granted. The estate tax return must include an opt-in election that the surviving spouse is electing portability of the deceased spouse’s unused exemption. Failure to file the estate tax return or to include the election will result in the loss of portability. Therefore, it is important to consult with an experienced estate and trust planning team to ensure that the portability election is made properly and timely.
Helping You Get There…
Portability is a powerful and beneficial estate planning tool that can help you and your family achieve your future financial goals. Evaluating your situation, assessing your options, and implementing the best plan for you and your loved ones is paramount. However, portability also comes with potential pitfalls and challenges that require careful attention and guidance. Whether navigating the complexities of portability or exploring other estate planning strategies, Boulay’s estate and trust planning team is here to help. Connect with us today to learn more about how we are committed to helping you get there with your estate and trust needs.