How Portability Can Help Reduce Estate Taxes

People with significant wealth can help maximize their beneficiaries' inheritance by making strategic use of the lifetime gift and estate tax exemption—the value of assets you can leave to heirs without incurring federal estate taxes. Of course, with the exemption at a historically high level of $15 million per individual in 2026 ($30 million for married couples), with adjustments for inflation thereafter, the tax pressures have decreased somewhat compared to the recent past.

However, it's still worth considering different estate planning strategies to make the most of the available tax benefits. And if you're not making full use of your own exemption, you can transfer any leftovers to a spouse using a tax provision known as portability.

Here's what to know.

Married couples can transfer an unlimited amount of assets to each other when they're alive or when they pass, entirely gift and estate tax-free. However, with the largest estates, doing so could saddle them with wealth that exceeds their own lifetime gift and estate tax exemption.

This is where portability comes in. When one spouse dies, the surviving spouse can add the unused portion of their deceased spouse's exemption to their own lifetime exemption.

For example, if your spouse had used $5 million of their exemption prior to their death, you'd be eligible to add the remaining $10 million to your limit, bringing your total limit to $25 million.

Portability isn't automatic. The executor of the surviving spouse's estate must elect to port over the deceased spouse's unused exemption when they file a U.S. Estate, Gift, and Generation-Skipping Return (Form 706). In general, they must do so within nine months of a spouse's death if the estate exceeds the estate tax threshold (note that automatic six-month extensions are available using Form 4768).

What about with smaller estates that aren't required to file a return? The IRS grants such estates a five-year window to make a late-election filing.

That said, even if you don't think your assets will exceed your individual estate tax exemption, it could still be a good idea to file for portability upon your spouse's death.

Keep in mind that there are some costs attached to such filings, mostly for attorney and tax planner fees, which will generally depend on the estate's complexity. However, filing can provide a safeguard against unexpected tax changes or outsized asset appreciation.

Portability isn't a panacea, particularly if you have complex estate needs. Beware these limitations:

• Highly appreciating assets may outpace the limit: Should the assets that pass to the surviving spouse appreciate significantly, even the combined estate tax exemptions may not be enough to shield the estate from taxes. Furthermore, the ported over unused exemption amount—known as the deceased spousal unused exclusion (DSUE)—doesn't grow with inflation.
• Portability doesn't apply to the generation-skipping transfer (GST) tax exemption: While the lifetime gift and estate tax exemption is portable between spouses, the GST tax exemption—which allows transfers to grandchildren and further descendants GST tax-free, up to the lifetime limit of $15 million per individual in 2026—is not.
• State estate taxes may still be levied: Even if you believe portability would shield your estate from federal taxes, 12 states—Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington—as well as the District of Columbia charge their own estate taxes, and their exemption limits tend to be much lower than the federal limit. (Only Connecticut has the same estate tax exemption limit as the federal limit.)