G.60.2 Portability of Estate Tax Exemption

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1 A. Professional Conduct and Regulation

A.1 Code of Ethics and Standards of Conduct A.1.1 The Six Ethical Principles A.2 Procedural Rules and Discipline A.2.1 Fitness Standards for Candidates A.3 Financial Institutions Overview A.3.1 Broker-Dealers vs. RIAs A.4 SEC and Securities Regulation A.4.1 FINRA and Broker-Dealer Regulation A.4.2 State Securities Regulation A.5 Consumer Protection Laws A.5.1 Privacy and Confidentiality Requirements A.6 Fiduciary Duty and Application

2 B. General Principles of Financial Planning

B.7 The Financial Planning Process B.7.1 Establishing the Client Relationship B.7.2 Gathering Client Data and Goals B.8 Personal Financial Statements B.8.1 Key Financial Ratios B.9 Cash Flow Management B.9.1 Emergency Fund Planning B.10 Debt Management Strategies B.10.1 Mortgage and Home Financing B.11 Economic Concepts B.11.1 Planning for Inflation B.12 Time Value of Money Concepts B.12.1 TVM Calculations and Applications B.12.2 Loan Amortization B.13 Education Needs Analysis B.14 Education Savings Vehicles B.14.1 529 Plans In-Depth B.15 Education Funding Strategies B.16 Gift/Income Tax Strategies

3 C. Risk Management and Insurance Planning

C.17 Principles of Risk and Insurance C.17.1 Risk Management Process C.18 Analysis of Risk Exposures C.19 Health Insurance Fundamentals C.19.1 Types of Health Insurance Plans C.20 Disability Income Insurance C.20.1 Disability Policy Features C.21 Long-Term Care Insurance C.22 Annuities Overview C.22.1 Fixed vs. Variable Annuities C.23 Life Insurance Fundamentals C.23.1 Types of Life Insurance C.24 Business Owner Insurance Solutions C.25 Insurance Needs Analysis C.26 Insurance Policy and Company Selection

4 D. Investment Planning

D.27 Equity Securities D.27.1 Fixed Income Securities D.27.2 Mutual Funds and ETFs D.27.3 Taxation of Investment Vehicles D.28 Systematic Risk D.28.1 Unsystematic Risk D.29 Economic and Market Cycles D.30 Measures of Risk and Return D.30.1 Investment Performance Measures D.31 Asset Allocation Strategies D.31.1 Portfolio Diversification D.32 Bond and Stock Valuation D.32.1 Stock Valuation Models D.33 Investment Policy Statement D.33.1 Modern Portfolio Theory D.34 Active vs. Passive Investing D.34.1 Common Investment Strategies D.35 Alternative Investments D.35.1 Options and Derivatives

5 E. Tax Planning

E.36 Income Tax Fundamentals E.36.1 Filing Status and Tax Brackets E.37 Types of Income E.37.1 Deductions and Credits E.37.2 Capital Gains and Losses E.38 Business Entity Taxation E.38.1 Self-Employment Tax E.39 Taxation of Trusts and Estates E.40 Tax Reduction Strategies E.40.1 Retirement Account Tax Strategies E.41 Property Transactions E.41.1 Basis Rules for Acquired Property E.42 AMT and NIIT E.42.1 Special Tax Situations E.43 Charitable Giving Strategies

6 F. Retirement Savings and Income Planning

F.44 Retirement Needs Analysis F.44.1 Sources of Retirement Income F.45 Social Security Benefits F.45.1 Social Security Claiming Strategies F.45.2 Medicare Planning F.46 Eldercare and Special Needs Planning F.47 Qualified Plan Overview F.47.1 Defined Benefit Pension Plans F.47.2 Defined Contribution Plans F.48 Eligibility and Vesting F.48.1 Coverage and Discrimination Testing F.48.2 Contribution and Benefit Limits F.48.3 401(k) Plan Features F.49 Non-Qualified Deferred Compensation F.49.1 Executive Compensation Plans F.50 Retirement Plan Selection for Businesses F.50.1 Individual Retirement Accounts F.51 Distribution Rules F.51.1 Required Minimum Distributions F.52 Retirement Income Strategies F.52.1 Tax-Efficient Withdrawal Strategies F.53 Business Succession Planning

7 G. Estate Planning

G.54 Property Titling and Beneficiary Designations G.54.1 Beneficiary Designations G.55 Strategies to Transfer Property G.55.1 Lifetime Gifting Strategies G.56 Wills and Estate Documents G.56.1 Powers of Attorney G.56.2 Advance Directives and Healthcare Documents G.57 Federal Gift Tax G.57.1 Federal Estate Tax G.57.2 Generation-Skipping Transfer Tax G.58 Sources for Estate Liquidity G.58.1 Life Insurance for Estate Liquidity G.59 Trust Fundamentals G.59.1 Revocable Living Trusts G.59.2 Irrevocable Trusts G.59.3 Trust Income Taxation G.60 Marital Deduction Planning G.60.1 QTIP Trusts G.60.2 Portability of Estate Tax Exemption G.61 Intra-family and Business Transfer Techniques G.61.1 Family Limited Partnerships G.61.2 GRATs and IDGTs G.62 Postmortem Estate Planning Techniques G.62.1 Disclaimer Planning G.62.2 Estate Tax Elections G.63 Planning for Divorce and Unmarried Couples G.63.1 Estate Planning for Unmarried Couples G.63.2 Planning for Blended Families G.64 Planning for Special Needs and Circumstances G.64.1 Special Needs Trusts G.64.2 ABLE Accounts

8 H. Psychology of Financial Planning

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G.60.2 Portability of Estate Tax Exemption

Key Takeaways Explain This Topic AI

DSUE transfers unused exclusion from first spouse to surviving spouse

Portability requires timely Form 706 filing (even if no tax is due)

Only LAST deceased spouse's DSUE is available

GST exemption is NOT portable - only federal estate tax exemption

Credit shelter trusts still advantageous for growth protection and state taxes
Last updated: January 2026

Portability of Estate Tax Exemption

Portability, enacted in 2010 and made permanent in 2013, allows a surviving spouse to use the deceased spouse's unused federal estate and gift tax exemption. This Deceased Spousal Unused Exclusion (DSUE) amount can significantly simplify estate planning for married couples while potentially doubling the amount that can pass tax-free to heirs.

How Portability Works
The DSUE Amount

The Deceased Spousal Unused Exclusion (DSUE) is the portion of the federal estate tax exemption that the first spouse to die did not use. The DSUE is calculated as:

DSUE = Basic Exclusion Amount - (Taxable Estate + Adjusted Taxable Gifts)
2025 and 2026 Exemption Amounts

Year Individual Exemption Married Couple (with portability)
2025 $13.99 million $27.98 million
2026 $15.00 million $30.00 million

Note: The One, Big, Beautiful Bill (OBBB), signed into law on July 4, 2025, permanently increased the basic exclusion amount to $15 million per taxpayer, preventing the scheduled 2026 sunset to pre-2018 levels.

Requirements for Portability Election

To elect portability, the following requirements must be met:

Decedent Must Be Survived by a Spouse : The election is only available for married decedents
Decedent Must Have Been a U.S. Citizen or Resident : Portability is not available for nonresident aliens
Timely Filing of Form 706 : A federal estate tax return must be filed, even if no estate tax is due

Estate Must Affirmatively Elect Portability : The election is made by filing Form 706; there is no separate election form

Filing Requirements

Even if the estate is below the filing threshold (and no estate tax is due), Form 706 must be filed to elect portability. Important timing:

Due Date : 9 months after death
Extension : 6-month extension available if requested

Late Filing : Special relief available for up to 5 years after death if certain conditions are met (Rev. Proc. 2022-32)

Simplified Reporting : Estates filing solely for portability may use simplified asset valuation methods
The Last Deceased Spouse Rule

A critical limitation of portability is the last deceased spouse rule : a surviving spouse can only use the DSUE from their most recently deceased spouse .

How the Last Deceased Spouse Rule Works

If a surviving spouse remarries and the new spouse dies, the surviving spouse loses access to the DSUE from the first deceased spouse, regardless of whether a portability election was made for the second spouse.

Remarriage Scenarios (Dalton Example)

Consider the following scenario based on estate planning principles:

Example 1: Losing the First DSUE

Spouse A dies in 2020 with a $5 million exemption. DSUE of $5 million elected for Surviving Spouse B.

Surviving Spouse B remarries Spouse C.

Spouse C dies in 2025 with a $13.99 million exemption. Spouse C used $8 million for lifetime gifts.

Result : Surviving Spouse B now has access to Spouse C's DSUE ($5.99 million) but has LOST access to Spouse A's $5 million DSUE.

Example 2: Strategic Planning

Before Spouse C's death in the above example, Surviving Spouse B could have made taxable gifts using Spouse A's DSUE

Once used for lifetime gifts, the DSUE from Spouse A is "locked in" and cannot be lost
This strategy requires proactive planning before the second spouse's death
Example 3: Second Spouse Survives
Spouse A dies first; Spouse B remarries Spouse C
If Spouse B dies before Spouse C, the last deceased spouse rule does not apply to Spouse C
Spouse C never had access to Spouse A's DSUE (only spouses can receive DSUE from their own deceased spouse)
Practical Implications

Scenario First Spouse's DSUE
Surviving spouse never remarries Preserved (if elected)
Surviving spouse remarries; new spouse is still living Still available
New spouse dies and portability is elected Lost - replaced by new spouse's DSUE
New spouse dies without portability election Lost - no replacement DSUE
Portability vs. Credit Shelter Trust

Despite portability's simplicity, credit shelter trusts remain valuable planning tools. Understanding when each approach is preferable is critical for CFP candidates.

Comparison Table

Factor Portability Credit Shelter Trust
Simplicity Simple - just file Form 706 Complex - trust administration required
Cost Lower - no ongoing trust costs Higher - trust setup and annual administration
Step-Up in Basis Second step-up at second death No second step-up (assets excluded from estate)
Asset Protection None May protect from surviving spouse's creditors
Growth Protection Growth taxed in survivor's estate Growth excluded from survivor's estate
GST Exemption NOT portable Preserved in trust
State Estate Tax Usually NOT portable Shields assets from state tax
Blended Families No protection for children Protects children's inheritance
Remarriage Risk DSUE can be lost Assets protected in trust
Flexibility Surviving spouse controls assets Trustee controls per trust terms
When Credit Shelter Trusts Are Preferred

Large Estates with Expected Growth : If the combined estate exceeds the exemption and is expected to grow, a CST shelters that growth from estate tax

States with Estate Taxes : Only Hawaii and Maryland recognize portability for state estate tax. In other states (Connecticut, Illinois, Maine, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, Washington, and D.C.), a CST can reduce state estate tax.

Blended Families : A CST ensures children from a prior marriage receive their intended inheritance, regardless of surviving spouse's actions

GST Planning : The Generation-Skipping Transfer (GST) exemption is NOT portable. A CST can be allocated the first spouse's GST exemption for dynasty trust planning.

Asset Protection Concerns : A CST can protect assets from the surviving spouse's creditors, lawsuits, or future spouse in a remarriage

Remarriage Risk : If the surviving spouse might remarry, the DSUE could be lost. A CST preserves the exemption regardless of remarriage.

When Portability Is Preferred

Simple Estates : Smaller estates where simplicity outweighs other considerations

Basis Step-Up Priority : When maximizing stepped-up basis at the second death is the primary goal (e.g., highly appreciated assets)

Surviving Spouse Needs Full Control : When restrictions on asset access are not desired

Cost Sensitivity : When clients want to avoid trust administration costs

No State Estate Tax : In states without estate tax or with portable exemptions
Combined Strategies

Sophisticated planning often combines portability with credit shelter trusts:

Clayton Election (Contingent QTIP)

A Clayton election allows a trust to be funded based on the executor's decision at the first spouse's death:

If the executor makes a QTIP election, property goes to the marital trust
If no election is made, property funds the credit shelter trust
Provides postmortem flexibility to optimize based on actual circumstances
Disclaimer Planning

The surviving spouse can disclaim assets, which then fund a credit shelter trust:

Disclaimer must be made within 9 months of death
Provides flexibility without binding the surviving spouse
Portability Plus CST

Elect portability AND fund a credit shelter trust:

CST preserves GST exemption
DSUE provides backup exemption for surviving spouse's own assets
Maximizes protection for larger estates
Portability for Non-Citizen Spouses

Portability has special rules for non-citizen surviving spouses:

DSUE is NOT available unless assets pass to a QDOT
Non-citizen spouse cannot use DSUE unless they become a U.S. citizen before dying
If the surviving spouse becomes a citizen, the DSUE becomes available retroactively