Portability of Estate Tax Exemption

The portability of estate tax exemption refers to a provision in U.S. tax law that allows a surviving spouse to inherit any unused portion of the deceased spouse’s estate tax exemption. This mechanism helps to minimize the overall estate tax liability for married couples.

Under current tax law, each individual has an estate tax exemption amount (for 2023, this is $12.92 million). If a spouse dies and does not use the full amount of their exemption, the unused portion can be transferred to the surviving spouse. This is particularly beneficial when the value of the couple’s combined estate exceeds the individual exemption limit.

To utilize portability, the surviving spouse must file an estate tax return (Form 706) for the deceased spouse, even if the estate does not owe any tax. This return must be filed within nine months of the date of death, although an extension can be requested. Once filed, the surviving spouse can add the unused exemption to their own, effectively increasing their estate tax exemption limit.

For example, if Spouse A dies with an estate valued at $5 million and has an exemption of $12.92 million, the unused exemption amount of $7.92 million can be transferred to Spouse B. If Spouse B later passes away with an estate worth $10 million, they can now use the combined exemption of $12.92 million (their own $5 million plus the $7.92 million from Spouse A), potentially reducing or eliminating estate taxes owed.

In Texas, as in other states, the portability of estate tax exemption can significantly impact estate planning strategies for married couples, allowing for enhanced tax efficiency and protection of assets for heirs.