What is "Portability"?

A portability election allows estates of married taxpayers to pass along (i.e. “port”) the unused portion of a decedent’s exemption amount (i.e. the “deceased spousal unused exclusion” commonly known as the “DSUE amount”) to a surviving spouse.  For example, assume a couple owns $8 million of marital property, the husband dies in 2017, and the husband’s $4 million share of marital property passes outright to the surviving spouse.  A portability election allows the husband’s $5,490,000 DSUE amount (minus any exemption used on lifetime gifts) to be transferred to his wife, so that upon the wife’s death the husband’s DSUE amount can be added to her exemption amount if needed to shelter the wife’s estate from estate tax at that time.

 The only action required to elect portability of the DSUE amount, if any, is to file a timely and complete estate tax return, regardless of the amount of the gross estate.  Page 4 of the estate tax return can be used to (1) opt out of electing to transfer any DSUE amount to a surviving spouse, (2) calculate the amount of DSUE to be transferred in the event of an election, and/or (3) account for any DSUE amount received from predeceased spouse(s).

 Until recently, an executor seeking a late portability election needed to request a ruling request for a private letter ruling.  However, the IRS recently issued Revenue Procedure 2017-34, which has simplified the procedure for estates requesting an extension of time to make a portability election if (1) the executor was not required to file an estate tax return due to the value of the estate, and (2) the executor did not file a timely estate tax return.  In such cases, the executor may make a portability election by filing an estate tax return on or before the later of January 2, 2018, or the second annual anniversary of the decedent’s date of death.  The top of the estate tax return should say “FILED PURSUANT TO REV. PROC. 2017-34 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A).” 

 Only the estate tax exemption amount can be ported; the GST tax exemption cannot be ported.  Therefore, it is still common for credit shelter trusts to be funded upon the death of the first spouse.  Credit shelter trusts can also (1) provide the added benefit of removing appreciation from the surviving spouse’s estate, (2) provide asset protection, and (3) facilitate distribution planning.