Portability refers to the ability of a surviving spouse, to make use of a deceased spouse’s unused estate tax exclusion amount (DSUE amount). Portability was intended to simplify estate planning for married couples by eliminating the need for a bypass trust. However, in order to preserve the DSUE amount the surviving spouse must comply with a complex set of rules, including filing a federal estate tax return for the decedent even though one would not otherwise be required. Portability is not a substitute for traditional estate planning, particularly for high net worth individuals. However, it may prevent an otherwise unused DSUE amount from being completely lost.
Prior to the introduction of portability, traditional estate planning for married individuals involved the use of a “bypass” or “credit shelter” trust to hold the deceased spouse’s remaining estate tax exclusion, preventing the assets from being taxed again on the death of the surviving spouse. If the deceased spouse’s unused estate tax exclusion wasn’t fully used, whether due to insufficient assets or by use of the unlimited estate tax marital deduction, the unused amount was lost. Portability, however, now allows that unused DSUE amount to be transferred to the surviving spouse.
Making the Election. Portability is available only if the election is made by the deceased spouse’s executor. The rules for making the election are complex and must be carefully observed.
- The portability election is made by timely filing an estate tax return for the deceased spouse’s estate (including extensions). The estate tax return must be filed even if not otherwise required.
- The election must be made by the executor of the deceased spouse’s estate.
- The estate tax return must be complete and properly prepared. For smaller estates, a special rule allows executors to avoid reporting specific values for certain marital or charitable deduction property and instead provide a good faith estimate of the total value of such property on the estate tax return.
- The estate tax return must include a computation of the DSUE amount.
Smaller estates may opt out of portability simply by not filing an estate tax return. However, if an estate must otherwise file a return (e.g., because the value of the estate meets the filing threshold) in order to opt out of portability, the executor must make an affirmative statement that the estate is not electing portability.
Use of the DSUE Amount by the Surviving Spouse. If the portability election is made, the DSUE amount is added to the surviving spouse’s basic exclusion amount, creating a new applicable exclusion amount for the surviving spouse. The surviving spouse may use the new applicable exclusion amount for lifetime gifts or apply the amount to his or her estate at death, subject to the following rules.
- The surviving spouse may only use the DSUE amount of his or her last deceased spouse. If the surviving spouse remarries, he or she could lose the unused DSUE amount of the predeceased spouse if the new spouse dies first.
- A spouse who has survived multiple spouses may use the DSUE of the most recent last deceased spouse before the death of the next spouse, but not after.
- When a surviving spouse makes a taxable gift, the DSUE amount of the last deceased spouse is used before the surviving spouse’s own basic exclusion amount.
- If the surviving spouse remarries and the marriage ends in divorce or an annulment, the subsequent death of the divorced spouse does not end the status of the prior deceased spouse as the last deceased spouse.
Considerations for Electing Portability. Portability is available only when the deceased spouse’s taxable estate is less than his or her remaining estate tax exclusion amount. This can happen when the individual’s remaining estate is less than the exclusion or when part or all of the individual’s assets pass to the surviving spouse or charity, reducing the taxable estate to less than the exclusion amount.
For many individuals, use of a bypass trust and other traditional estate planning techniques will be more appropriate than relying on portability. Both tax and non-tax factors should be considered when determining whether portability is appropriate.
- A bypass trust can shield growth from estate tax on the survivor’s death.
- Assets held in a properly structured bypass trust can provide a level of asset protection for the surviving spouse.
- Portability does not apply to the generation-skipping transfer (GST) tax exemption. If the couple wishes to create a dynasty trust for the benefit of their descendants, the portability election should not be made as it could result in the loss of the deceased spouse’s unused GST tax exemption.
- Portability may be appropriate if it is important to receive another step-up in basis on the surviving spouse’s death. Assets that are included in the surviving spouse’s estate at death will receive a stepped-up basis, while assets in a bypass trust will not.
- If the surviving spouse is likely to remarry, the DSUE amount could be lost.
- A bypass trust ensures the deceased spouse’s assets are distributed in the manner desired by the deceased spouse.