When navigating the complexities of estate planning, many recently widowed spouses do not realize that they have a once-in-a-lifetime opportunity to make a crucial tax election. This often overlooked decision for surviving spouses is the portability election. This election can have significant financial implications, particularly due to the upcoming scheduled decrease in the federal estate tax exemption. Understanding why this election is essential now can help surviving spouses safeguard their assets and greatly reduce or eliminate federal estate tax risk.

What is Portability?

Portability is a provision in federal estate tax law that allows a surviving spouse to inherit the unused portion of their deceased spouse’s estate tax exemption. This combined exemption can substantially reduce or even eliminate estate taxes when the surviving spouse passes away. To utilize portability, the surviving spouse must file an estate tax return (Form 706) within nine months of the deceased spouse's death, although a six-month extension is possible. Once this election is made, the surviving spouse gets to keep the unused exemption forever – in addition to their own exemption.

However, many attorneys and accountants do not advise their clients to make the portability election, especially when there is no other reason to file a federal estate tax return. Critically, the election must be made on a timely filed federal estate tax return. The attorneys at Wagner Oehler, Ltd. regularly advise and guide many clients through making this vastly important, once-in-a-lifetime tax election.

The Impending Decrease in the Federal Estate Tax Exemption

Currently, the federal estate tax exemption is at an all-time high, set at $13.61 million per individual for 2024. This means a married couple can effectively shield $27.22 million from federal estate taxes. However, this exemption amount is set to decrease significantly in 2026, reverting to the pre-2018 levels of approximately $5 million per individual, adjusted for inflation. This reduction means a married couple's combined exemption will likely drop to around $10-12 million.

For farmers, business owners, real estate investors, physicians, and other professionals, the reduced federal exemption could trigger federal estate tax exposure that they do not currently have. Those individuals who recently lost their spouse can save the exemption that exists now, which could put them back into safe territory as it relates to the federal estate tax. See also: New USDA Study Projects Increase in Share of Farm Estates that owe Federal Estate Tax.

Why Make the Portability Election Now?

1. Preserve Existing Higher Exemption Amounts:

Making a portability election now allows surviving spouses to lock in the current higher exemption amounts. Even if the surviving spouse passes away after the exemption decreases, they can still utilize the larger exemption amount from their deceased spouse, potentially saving millions in estate taxes.

2. Future-Proofing Against Legislative Changes:

Estate tax laws are subject to change, and future legislation could further alter exemption amounts or the rules surrounding portability. By making the portability election now, surviving spouses can secure a known benefit under current law, providing a hedge against uncertain future changes. They get to lock-in the exemption that their deceased spouse left unused. For couples well below the combined federal exemption amount, this could result in lifelong protection against the federal estate tax no matter what the future exemption looks like.

3. Enhanced Financial Security:

Utilizing portability can help ensure that more of the estate's value is preserved for heirs rather than being lost to taxes. This financial security can be crucial for maintaining the family's standard of living and achieving long-term financial goals.

4. Simplified Estate Planning:

With the portability election in place, surviving spouses can simplify their estate planning. They won’t need to rely as heavily on complex strategies to maximize exemptions, such as leveraged gifting or irrevocable trusts, making the process more straightforward and potentially reducing legal fees and administrative burdens.

Keep in mind, however, that Minnesota does not allow portability. For Minnesota purposes, a credit shelter trust should be utilized at the death of the first spouse to maximize protections under Minnesota estate tax law. See also: Do You Need a Credit Shelter Trust? Does Minnesota have Portability? Why does it matter?

5. Maximize Lifetime Giving:

By preserving a higher exemption through portability, surviving spouses may have greater flexibility to make substantial lifetime gifts to heirs without incurring gift taxes. This strategy can be beneficial for wealth transfer planning, allowing for more effective management of assets across generations.

How to Make the Portability Election

To make the portability election, the executor of the deceased spouse’s estate must file a federal estate tax return within the specified time frame. This filing involves detailed documentation of the estate’s assets and valuation. It is advisable to work with a knowledgeable estate planning attorney to ensure accuracy and compliance with all requirements. Our attorneys are always working on compiling and filing both Minnesota and federal estate tax returns and understand the importance and weight of decisions made on the return, how those decisions impact the estate plan, and ultimately, how this important step leads to a successful transition of assets.

Conclusion

With the federal estate tax exemption set to decrease on January 1, 2026, now is the time for surviving spouses to consider making a portability election. This proactive step can lock in current high exemption amounts, provide financial security, and simplify estate planning. Surviving spouses must also recognize that they have the opportunity to make the portability election once in their lifetime. The IRS has strict rules regarding the form of the election as well as the timeframe in which it can be made. By understanding and acting on the benefits of portability, surviving spouses can better protect their assets and provide for their loved ones in the years to come.

For personalized advice and assistance with making a portability election, consult with one of our estate planning professionals who can guide you through the process and ensure that your estate planning goals are met.

To learn more about estate planning, keep an eye on our Events page located at: https://www.wagnerlegalmn.com/events/.

If you’re ready to start being proactive about your estate plan, contact us to get started.

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