Portability is the term used for the Deceased Spouse Unused Exclusion (DSUE). This election allows for any unused lifetime estate and gift exclusion to be transferred over to the surviving spouse.
The lifetime estate and gift exclusion allows for gifts and estates to be transferred to another party tax free. The lifetime exclusion is $12.92 million per person in 2023, but is expected to be reduced to $6 million in 2026. This amount is reduced for any gifts given over the annual exclusion ($17,000 in 2023) during the lifetime of the taxpayer. Upon the married taxpayer’s death, a timely filed 706 can transfer the remainder of the unused exclusion to the surviving spouse. Upon the surviving spouse’s death, they have a large exclusion to negate the harsh effects of most estate taxes.
There are some limitations on the DSUE though. When a person has one deceased spouse that elected portability on the 706 and then remarries, that person loses any DSUE from their first spouse. In essence, you can’t stack multiple DSUE from multiple deceased spouses.
With the DSUE expected to fall to $6 million in 2026 there are great estate planning strategies available now. If a husband dies in 2023 and has a surviving spouse a 706 should be filed to elect portability so the surviving spouse has a $12.92 million (reduced for any prior gift taxes) DSUE. So if the surviving spouse dies in 2026 the total lifetime exclusion would be $18.92 million ($12.92 million plus $6 million expected annual exclusion) reduced for any prior taxable gifts.
Even if the estate is less than the lifetime exclusion a 706 should still be filed to elect portability. Portability is automatic with a timely filed 706. Portability can be elected out of by simply checking a box on the 706 though.
Portability can now be elected late with new Rev. Proc. 2022-32. This revenue procedure allows for the election of portability as much as five years after the decedent’s date of death. This can help alleviate estate taxes for the surviving spouse when they ultimately pass away.
If you have any questions you would like to have answered about this topic, please reach out to Elaine Dougherty, CPA in our Morgantown office at 304-554-3371. You may also email Elaine at edougherty@suttlecpas.com.