Portable Exemption and DSUE Basics

Portability allows a surviving spouse to use any estate tax exemption that the first spouse did not use at death. This provision, made permanent in 2013, simplifies estate planning for married couples and provides flexibility in how and when the combined exemption is utilized.

Understanding the Estate Tax Exemption

Every U.S. citizen or resident has a lifetime exemption from federal estate and gift taxes. In 2024, this exemption is $13.61 million per person. Assets transferred during life or at death within this exemption amount pass tax-free. Amounts exceeding the exemption are taxed at 40%.

For married couples, the combined exemption in 2024 is $27.22 million ($13.61 million each). However, without proper planning, a portion of this combined exemption could be lost when the first spouse dies.

What Is Portability?

Portability is the transfer of a deceased spouse's unused estate tax exemption to the surviving spouse. The technical term is Deceased Spousal Unused Exclusion (DSUE).

Before Portability:

Prior to 2011, if the first spouse died without using their full exemption, that unused amount was lost. Couples needed complex trust arrangements (such as credit shelter trusts or bypass trusts) to ensure both exemptions were utilized.

With Portability:

The surviving spouse can add the deceased spouse's unused exemption to their own exemption. This occurs automatically upon election, without requiring the deceased spouse to have created trusts or made lifetime gifts.

How DSUE Works

When the first spouse dies, their estate calculates how much of the $13.61 million exemption was used by:

• Taxable gifts made during lifetime
• Taxable estate value exceeding available deductions

The unused portion becomes the DSUE amount. The surviving spouse can use this DSUE for:

• Lifetime gifts
• Estate tax at the surviving spouse's death
• Any combination of the above

Important: The surviving spouse's own exemption must be used first. DSUE is used only after the surviving spouse's exemption is exhausted.

Electing Portability: Form 706 Requirement

Portability is not automatic. The deceased spouse's estate must file IRS Form 706 (United States Estate and Generation-Skipping Transfer Tax Return) and affirmatively elect portability.

Filing Requirements:

• Deadline: Form 706 must be filed within 9 months of the date of death (with a 6-month extension available upon request)
• Filing Threshold: An estate must file Form 706 if the gross estate plus adjusted taxable gifts exceeds the exemption amount. However, estates below this threshold may still file solely to elect portability.
• Late Filing Relief: The IRS has provided simplified procedures for estates to elect portability within 5 years of death if no return was otherwise required

Cost Consideration:

Preparing Form 706 requires professional assistance and typically costs $5,000-$25,000 or more, depending on estate complexity. For estates where the surviving spouse is unlikely to need the additional exemption, this cost may not be justified.

2024 Combined Exemption Amounts

The exemption amount is indexed for inflation and adjusts annually. However, under current law, the exemption is scheduled to decrease to approximately $7 million per person (adjusted for inflation) on January 1, 2026, when provisions of the Tax Cuts and Jobs Act of 2017 expire.

Worked Example: First Spouse Dies with $5 Million Estate

Background:

Robert and Susan are married with a combined estate of $25 million. Robert dies in 2024 with assets in his name worth $5 million. All assets pass to Susan under his will.

Step 1: Calculate Robert's Taxable Estate

Robert made no taxable gifts during his lifetime. His gross estate is $5 million.

The marital deduction applies to assets passing to Susan: $5 million deduction.

Robert's taxable estate: $5,000,000 - $5,000,000 = $0

Estate tax due: $0

Step 2: Calculate DSUE Amount

Robert's applicable exclusion amount: $13,610,000 (2024)

Minus: Taxable estate ($0) and adjusted taxable gifts ($0) = $0

DSUE amount: $13,610,000 - $0 = $13,610,000

However, because all assets passed to Susan under the marital deduction, the full exemption of $13.61 million is unused and available as DSUE.

Actually, let's recalculate more precisely:

Robert's basic exclusion amount: $13,610,000

Robert's taxable estate after marital deduction: $0

Robert's exemption used: $0

DSUE available to Susan: $13,610,000

Step 3: File Form 706

Susan, as executor, files Form 706 for Robert's estate within 9 months of his death. The return shows:

• Gross estate: $5,000,000
• Marital deduction: $5,000,000
• Taxable estate: $0
• DSUE election: Yes
• DSUE amount: $13,610,000

Step 4: Susan's Available Exemption

After Robert's death, Susan has:

• Her own exemption: $13,610,000
• Robert's DSUE: $13,610,000
• Total available exemption: $27,220,000

Susan now has $25 million in assets and $27.22 million in combined exemption. Her estate can pass entirely free of federal estate tax.

Alternative Scenario: No Portability Election

If Form 706 had not been filed:

• Susan's exemption: $13,610,000
• Robert's DSUE: $0 (not elected)
• Susan's estate at death: $25,000,000
• Taxable amount: $25,000,000 - $13,610,000 = $11,390,000
• Estate tax (40%): $4,556,000

The cost of not filing Form 706: $4,556,000 in unnecessary estate tax.

Important Limitations and Considerations

Only Last Deceased Spouse:

A surviving spouse can only use DSUE from their last deceased spouse. If Susan remarries and her new spouse dies with a smaller DSUE, she loses Robert's DSUE and receives only the new spouse's amount.

No Portability for GST Exemption:

The generation-skipping transfer (GST) tax exemption is not portable. If Robert wanted to leave assets in trust for grandchildren using his GST exemption, that must be done through his estate plan, not through portability.

Future Exemption Changes:

DSUE is locked in at the amount available when the first spouse died. If the exemption decreases (as scheduled for 2026), the surviving spouse retains the DSUE from the first spouse's death but their own exemption decreases.

Inflation Adjustment:

The surviving spouse's own exemption continues to adjust for inflation. DSUE is fixed at the amount determined when the first spouse died.

State Estate Taxes:

Portability applies only to federal estate tax. Many states with estate taxes do not recognize portability. Planning for state taxes may still require trust arrangements.

When Portability May Be Insufficient

Consider trust-based planning (rather than relying solely on portability) when:

• Combined estate significantly exceeds combined exemption
• Asset protection for surviving spouse is important
• Beneficiaries other than surviving spouse should receive assets at first death
• Generation-skipping planning is needed
• State estate tax planning is relevant
• Concern about surviving spouse's potential remarriage
• Significant future appreciation is anticipated

Pre-Implementation Checklist

• Review both spouses' assets and estimate combined estate value
• Determine if combined estate may exceed combined exemption
• Understand state estate tax rules and whether state recognizes portability
• Ensure surviving spouse or executor knows to file Form 706
• Calendar the 9-month filing deadline (plus 6-month extension if needed)
• Gather documentation for estate valuation and Form 706 preparation
• Engage qualified estate tax attorney or CPA for Form 706 preparation
• Review whether trust planning is advisable despite portability availability
• Consider GST planning needs (not covered by portability)
• Discuss implications if surviving spouse might remarry
• Document lifetime gifts made by deceased spouse (affects DSUE calculation)
• Review beneficiary designations on retirement accounts and insurance
• Update surviving spouse's estate plan to reflect inherited DSUE
• Monitor exemption amount changes, particularly the 2026 scheduled reduction