Estate planning often conjures images of wills, trusts, and tangible assets. But estate planning is more than just legal documents—it's about ensuring your family's future is secure and your wishes are honored. In our family practice, we believe in building close, personal relationships with our clients, guiding them through the complexities of estate planning with compassion and clarity.
One crucial aspect of estate planning that often goes overlooked is portability. Portability allows a surviving spouse to utilize any unused portion of their deceased spouse's federal estate tax exemption. With the current exemption at a historic high but scheduled to decrease in 2026, understanding and implementing portability has never been more important.
By proactively incorporating portability into your estate plan, you can maximize tax benefits and ensure a smoother transition for your loved ones. Our goal is to educate and empower you to make informed decisions that protect your family's legacy.
Understanding Portability in Estate Planning
To better understand portability, let’s imagine a couple, Sarah and Michael, who have built a comfortable life together. Michael passes away, leaving his entire estate to Sarah. Due to the unlimited marital deduction, no estate taxes are owed at this point. However, Michael's unused federal estate tax exemption doesn't automatically transfer to Sarah. To preserve this benefit, the executor of Michael's estate must file IRS Form 706 within a specified timeframe, electing portability.
By making this election, Sarah can add Michael's unused exemption to her own, potentially doubling the amount she can pass on to heirs tax-free. This strategy becomes especially crucial as estate tax laws evolve.
Portability, introduced in 2011, allows a surviving spouse to utilize any unused portion of their deceased spouse's federal estate tax exemption. As of 2025, the exemption stands at $13.99 million per individual, meaning a married couple can potentially shield up to $27.98 million from federal estate taxes. However, this benefit isn't automatic. The executor must file IRS Form 706 within five years of death, as per Revenue Procedure 2022-32, to elect portability.
It's important to note that portability doesn't apply to state estate taxes or the Generation-Skipping Transfer (GST) tax exemption. Therefore, comprehensive estate planning should consider these factors to ensure a family's financial legacy is preserved.
The Impending 2026 Estate Tax Exemption Reduction
The Tax Cuts and Jobs Act of 2017 temporarily doubled the federal estate tax exemption. However, this provision is set to expire on December 31, 2025. Absent congressional action, the exemption will revert to $5 million, adjusted for inflation, estimated to be around $6.8 million in 2026. This significant reduction could expose many estates to federal estate taxes that are currently exempt. By electing portability now, surviving spouses can lock in the higher exemption amount, providing a buffer against future tax liabilities.
Strategic Considerations for Utilizing Portability
While portability offers substantial benefits, it's essential to understand its limitations and how it fits into a broader estate planning strategy:
- Not Automatic: Portability must be elected by filing Form 706, even if the estate isn't otherwise required to file.
- GST Tax Exemption: Portability does not apply to the Generation-Skipping Transfer (GST) tax exemption. Separate planning is needed for GST considerations.
- State Estate Taxes: Not all states recognize portability. For instance, states like Illinois and New York have their own estate tax systems with lower exemption amounts and do not allow portability.
- Asset Appreciation: If the surviving spouse's estate grows significantly, the combined exemptions may still be insufficient, leading to potential estate taxes.
Incorporating trusts, such as credit shelter trusts, can complement portability by providing asset protection and potential tax advantages.
Implementing Portability in Your Estate Plan
Estate planning is not just about numbers and forms—it's about people, relationships, and the legacies they leave behind. Portability is a powerful tool that can help families preserve their wealth and ensure that their loved ones are taken care of. To effectively utilize portability:
- Consult an Estate Planning Attorney: Engage with professionals to assess your estate's specific needs and ensure compliance with current laws.
- Timely Filing: Ensure that Form 706 is filed within the stipulated time frame to elect portability.
- Review and Update Documents: Regularly update your estate planning documents to reflect changes in laws and personal circumstances.
- Consider Lifetime Gifting: Utilize the current higher exemption by making lifetime gifts, which can reduce the taxable estate and lock in the exemption amount.
- Stay Informed: Monitor legislative developments that may impact estate tax laws and adjust your planning accordingly.
Conclusion
Portability serves as a vital tool in estate planning, offering flexibility and potential tax savings for married couples. With the anticipated reduction in the federal estate tax exemption in 2026, proactive planning is essential. By understanding and implementing portability, individuals can better safeguard their assets and ensure a smoother transfer of wealth to future generations.
To explore how portability can benefit your estate plan, contact Bascom Law at BascomLaw.com or call 770-285-5493.
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