Simple Mistake Costs Estate Big Tax Break

Forbes

2 days ago

The portability of the lifetime estate and gift tax exemption amount between spouses was introduced in the 2010 tax law. But details of portability aren't well-known, and misunderstandings can cost an estate a lot of money.
Each individual has a lifetime exemption from the estate and gift tax, which is $13.99 million in 2025 and will rise to $15 million in 2026. After that, it will be indexed for inflation.
When one spouse dies and his or her estate doesn't use the entire lifetime exemption, the unused exemption amount can be passed to the surviving spouse.
The surviving spouse then has an estate and gift tax exemption equal to his or her own exemption amount plus the unused amount of the deceased spouse. The surviving spouse's exemption amount is increased for inflation each year. But the unused amount from the deceased spouse isn't increased for inflation.
The transfer of the unused amount is known as portability, though that term isn't used in the tax code or regulations.
Because of portability, it's frequently said that a married couple has an estate and gift tax exemption amount of twice the individual exemption amount. But that's not the full story.
It's often overlooked that passing the unused exemption amount to the surviving spouse isn't automatic.
The regulations require the estate executor of the first spouse to die to elect to pass on the unused exemption. If the election isn't made, the unused exemption amount doesn't pass to the surviving spouse.
The election is made when the executor makes a timely filing of an estate tax return for the deceased spouse. No special document or language is needed to make the election.
The IRS considers the portability option to be elected if an estate tax return is filed, unless there's a statement saying that the unused exemption amount isn't being transferred to the surviving spouse.
To transfer the unused exemption amount, the estate tax return must be filed even if one isn't otherwise required and the estate's value is far less than the deceased spouse's exemption amount.
That's the trap estates fall into. The executor sees that the estate's value is far less than the deceased's exemption amount and doesn't file an estate tax return because one isn't required. But not filing the return means the unused exemption amount doesn't pass to the surviving spouse.
Also, if an estate tax return is filed to ensure the unused exemption passes to the surviving spouse, the return must be timely, complete and accurate. Otherwise, the transfer of the exemption amount is void.
An estate recently learned these lessons the hard way.
The wife passed away with an estate valued at less than the exemption amount. The executor obtained an extension of the deadline for filing the estate tax return. But the executor didn't file the return until well after the new deadline.
The husband died two years after the wife. His executor filed an estate tax return claiming his exemption amount plus the unused portion of the late wife's exemption. The IRS denied the use of the late wife's exemption amount, and the Tax Court agreed.
The wife's estate tax return wasn't properly filed, because it was late. In addition, required information was missing, such as an itemization of the estate's assets and the fair market values of the assets on the date of her death.
If there's any possibility a surviving spouse's estate might exceed that spouse's lifetime exemption amount at some point in the future, the executor of the estate of the first spouse to pass away should file an accurate, timely estate tax return to preserve any unused exemption amount for the surviving spouse.
When deciding whether to exercise the portability election, keep in mind that the estate tax exemption amount is indexed to the Consumer Price Index. It's possible that the rate of return on investments will exceed the CPI. That could cause an estate that's comfortably below the estate exemption amount to exceed the amount after a decade or more of compounding.
(Estate of Rowland v. Commissioner, T.C. Memo 2025-76)