Great news for those who missed the deadline to file for portability: Uncle Sam is giving you a second chance.
Portability allows a surviving spouse to claim for his/her own estate any unused portion of the deceased spouse’s unified estate tax and gift tax exemption. Portability went into effect on January 1, 2011. Estate administrators have been required to file for portability within two years of the surviving spouse’s death, with a six-month extension available. Now, the IRS has extended the deadline: Effective July 8, survivors have five years from the date of the spouse’s death to claim portability. If your spouse has passed away on or since July 8, 2017, you may still file for portability.
Here is an overview of the portability provision and how it can allow a surviving spouse to save on federal estate taxes and pass on more tax-free money to heirs:
Current Unified Gift and Estate Tax Exemption
Currently, an individual may give away, during life and at death, a total of $12.06 million, free of gift tax and estate tax. For example, if Mr. Jones passes away this year and leaves an estate of $7 million, and leaves that to people other than his wife or to a credit shelter trust, he will not have used $5.06 million of his lifetime exemption ($12.06 million – $7.0 million). His widow, Mrs. Jones, can utilize portability to add his unused $5.06 million exemption to her own exemption (whatever exemption level is in effect for her at the time of her death). If he leaves it all to her rather than to anyone else, she will then have both his full exemption, as well as her own exemption is at the time of her death.
Gift and Estate Tax Exemption To Plummet in 2026
Effective January 1, 2026, the lifetime estate tax exemption will revert to its pre-2017 level, adjusted for inflation, reducing the amount of tax-free money that can be passed on. Experts guesstimate that the 2026 exemption will end up somewhere in the $6.2 million range. Here are examples of how this change in exemption level will affect a surviving spouse’s ability to pass on tax-free money to beneficiaries:
Example 1. Let’s say Mr. Jones has a gross estate of $3 million. When he dies, he leaves his wife $2 million and his children, $1 million. Any amount left to a spouse is not deducted from the decedent’s estate tax exemption. Therefore, Mr. Jones has used up $1 million of the $12.06 million exemption to which he was entitled, leaving $11.06 unused. Mrs. Jones, the survivor, may now file to have Mr. Jones’ unused exemption of $11.06 million added to whatever exemption the law gives her at the time of her death.
Example 2: Using the above example, let’s assume Mrs. Jones, the survivor, passes away in 2027, when the exemption has gone down to $6.2 million. Mrs. Jones leaves an estate of $15 million. An estate tax return is filed for her, showing she has her own exemption of $6.2 million, plus the unused exemption ported over from her husband’s estate, or $11.06 million, for a total of $17.08 million. Thus, she can pass her entire estate, $15 million, free of estate tax.
Now let’s say Mrs. Jones did not exercise her right to portability and thus is not entitled to any of her late spouse’s unused exemption. Her exemption at her death would be $6.2 million. The $8.8 million difference between the value of her estate and her exemption ($15 million minus $6.2 million) would be $8.8 million. That $8.8 million would be taxed at a rate of 40%, and Mrs. Jones’ estate would owe $3,872,000 in estate taxes (40% of $8.8 million).
Circumstances That Make Claiming Portability A Smart Move
Claiming portability is obviously wise when the surviving spouse has significant assets and it is likely that his/her own estate will be taxable upon death. But claiming portability can also be a smart move even for a surviving spouse with more modest assets. First, preserving the portability option is a safeguard against future reductions in the estate tax exemption that would make even smaller estates subject to federal estate tax (such as the dramatic reduction we expect in January 2026). Preserving portability is also worthwhile for younger couples, because there is the chance that the survivor could accumulate significant wealth in future years.
How To Claim Portability
To claim a deceased spouse’s exemption, the personal representative of the decedent’s estate must take the portability election on the estate tax return, IRS Form 706. To claim portability, the 706 must be filed even if the estate of the decedent is not subject to federal estate tax.
The time restrictions to file depend on the tax status of the decedent’s estate:
If the decedent’s estate is taxable: The estate tax return must be filed within nine months following the decedent’s date of death, or the last day of the extension period if an extension has been granted.
If the decedent’s estate is not taxable: Until now, the administrator of the estate had up to two years from the date of death to file the return and claim the portability option. However, the IRS has reported that numerous estates have missed the deadline because administrators did not realize they were required to file a return even for a non-taxable estate. The IRS has therefore issued IRS Revenue Procedure 2022-32 which gives estate administrators up to five years from the death of death to file the return and elect portability. This new rule went into effect on July 8, 2022.
A Huge Caveat!
If you are a surviving spouse and you remarry, you lose the right to your retain your prior spouse’s unused exemption – even if portability was properly filed for and preserved!
The Karp Law Firm Can Help Personal Representatives and Trustees
Our law firm’s estate administration department provides support and guidance for both personal representatives and trustees who are administering estates. Our attorneys can advise you about the possibility of claiming portability, and our Certified Public Account can handle completing and filing the required estate tax return. We can help you even if our firm did not create the original will or trust. If you need help, give us a call at (561) 625-1100 or email KLF@karplaw.com.