Estate portability elections of unused estate and gift tax exemption must be meticulously prepared

Editor: Robert Venables, CPA, J.D., LL.M.

When making a portability election, strict compliance with all the requirements is important. This item outlines the applicable rules, highlights a recent Tax Court decision, and provides key takeaways for practitioners. It concerns estate and gift tax only as it applies to U.S. citizens or residents.

The estate tax is imposed on the transfer of property at death (Sec. 2001(a)), while the gift tax is imposed on the transfer of property during life (Sec. 2501(a)). Both use the same tax rate schedule, with a maximum rate of 40% (Secs. 2001(c) and 2502(a)). An exemption is provided to each individual, which effectively allows for a certain maximum amount of transfers before there is an estate/gift tax liability. For purposes of these taxes, every individual is provided with a basic exclusion amount (BEA). For 2026, the BEA is set by statute at $15 million (Sec. 2010(c)(3)(A)). The BEA will be adjusted for inflation annually beginning in 2027 (Sec. 2010(c)(3)(B)). The estate tax rate schedule under Sec. 2001(c) is then applied to the BEA to arrive at the applicable credit amount (i.e., a tax credit) that offsets any estate or gift tax that would otherwise be due (Secs. 2010(c) and 2505(a)). This credit has the effect of allowing every individual to transfer $15 million of property free of estate/gift tax during life and/or at death.

Prior to 2011, any unused estate/gift tax exemption at the death of an individual could not be transferred to any other individual. However, Section 303 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, P.L. 111–312 (TRUIRJCA) (made permanent by the American Taxpayer Relief Act of 2012, P.L. 112–240), amended Sec. 2010(c) to allow portability of the applicable exclusion amount (AEA) between spouses, effective for deaths occurring after Dec. 31, 2010. The TRUIRJCA amended Sec. 2010(c) to define the AEA as the sum of the BEA and, in the case of a surviving spouse, the deceased spousal unused exclusion (DSUE) amount. Sec. 2010(c)(4) defines the DSUE as the lesser of (1) the BEA or (2) the AEA of the last–deceased spouse less the amount of AEA that the last–deceased spouse consumed due to their own transfers during life and at death. This change in the law allows any unused estate/gift tax exemption at the death of one spouse to be transferred to the surviving spouse, capped at the BEA. In other words, in 2026, a married couple effectively has an estate/gift tax exemption of $30 million.

Sec. 2010(c)(5)(A) requires the executor of the estate of the deceased spouse to perform the following four steps in order to make a valid portability election that allows a surviving spouse to take into account the DSUE of a predeceased spouse:

1. File an estate tax return on behalf of the deceased spouse;
2. Compute the DSUE amount on the estate tax return of the deceased spouse;
3. Elect portability of the DSUE amount on the estate tax return of the deceased spouse; and
4. File the estate tax return of the deceased spouse by the due date (including extensions).

Sec. 2010(c)(5)(B) allows the IRS to examine the estate tax return of the deceased spouse to determine the DSUE amount even after the statute of limitation has expired for assessing both estate and gift tax.

When the DSUE election needs to be made and extensions available

Again, for a portability election to be effective, an election must be made on a timely filed estate tax return filed by the executor of the predeceased spouse’s estate. An estate tax return is generally due within nine months of the decedent’s date of death (Sec. 6075(a)). A six–month extension of time to file can be secured by filing Form 4768, Application for Extension of Time to File a Return and/or Pay U.S. Estate (and Generation–Skipping Transfer) Taxes, by the original due date of the estate tax return (Regs. Sec. 20.6081–1). Rev. Proc. 2022–32 provides an automatic extension of time to file to the fifth anniversary of the decedent’s date of death but only for executors not required to file an estate tax return because the value of the decedent’s gross estate plus adjusted taxable gifts (made after Dec. 31, 1976) is less than the BEA.

Portability in circumstances in which the DSUE is uncertain

The timely filing of a complete and properly prepared estate tax return makes a deemed portability election unless the executor affirmatively chooses to opt out (Regs. Sec. 20.2010–2(a)(2)), which can be done by checking a checkbox on Form 706, United States Estate (and Generation–Skipping Transfer) Tax Return, Page 5, Section A. Alternatively, an opt–out election can be made by attaching a statement to the estate tax return declaring that the estate is not electing portability under Sec. 2010(c)(5) or by simply not filing an estate tax return by the due date (Regs. Sec. 20.2010–2(a)(3)).

Computation of the DSUE amount is another essential element for a portability election to be valid (Sec. 2010(c)(5)(A)). The DSUE computation is made on Form 706, Page 5, Section C. The DSUE amount is generally available to the surviving spouse as of the predeceased spouse’s date of death and can be used against transfers made by the surviving spouse after the predeceased spouse’s date of death (Regs. Sec. 20.2010–3(c)(1)). Generally, a DSUE election, once made, is irrevocable unless the executor of the predeceased spouse’s estate supersedes a previously made portability election on an estate tax return filed on or before the due date of the return, including extensions actually granted (Regs. Sec. 20.2010–2(a)(4)). The DSUE amount can be adjusted to the extent it is reduced by a valuation adjustment or correction of an error in the calculation or to the extent that the surviving spouse cannot substantiate the DSUE claimed on the surviving spouse’s estate/gift tax return (Regs. Sec. 20.2010–3(c)(1)).

The preamble to the final regulations issued under Sec. 2010 (T.D. 9725) confirms that a valid portability election has been made in a situation where the filing of a complete and properly prepared estate tax return results in a DSUE of zero but subsequent adjustments to the return would result in a DSUE being available to the surviving spouse. The preamble describes a hypothetical situation in which an estate tax return is filed with no unused exemption available to the surviving spouse. That same return includes a protective claim for refund attributable to a claim against the estate, and subsequently, the estate becomes eligible for a deduction because a payment attributable to the claim is made, resulting in a reduction in estate tax that further results in unused exemption becoming available to the surviving spouse. In such a situation, the computation of the DSUE would not have been presented on the first estate tax return filed because the result would have been zero. The preamble to the final regulations clarifies that a valid portability election has been made, and the recomputed DSUE will be available to the surviving spouse so long as the executor did not opt out of portability on the first estate tax return filed. There is no need for a protective DSUE election.

‘Complete and properly prepared’ estate tax return

Again, Regs. Sec. 20.2010–2(a)(2) provides that a portability election is made upon the timely filing of a complete and properly prepared estate tax return. Regs. Sec. 20.2010–2(a)(7)(i) provides that an estate tax return will be considered complete and properly prepared if it is prepared in accordance with the instructions for Form 706 and the regulations issued under Sec. 6018. However, Regs. Sec. 20.2010–2(a)(7)(ii) provides a special rule for certain property for estates filing a return solely to elect portability (i.e., estates that do not otherwise have a filing requirement). Under the special rule, the value of certain property that qualifies for the marital or charitable deduction does not need to be reported. Only the description, ownership, and/or beneficiary of the property, along with all other information necessary to establish the right of the estate to the marital or charitable deduction, needs to be reported (Regs. Sec. 20.2010–2(a)(7)(ii)(A)). The special rule for marital and charitable deduction property does not apply in the following situations:

• The value of the marital or charitable deduction property relates to, affects, or is needed to determine the value passing from the decedent to another beneficiary;
• If the value of such property is needed to determine the estate’s eligibility to use the alternate valuation date, to value certain real estate, or to determine eligibility for another estate or generation-skipping transfer tax provision of the Code for which the value of the property or the value of the gross estate or adjusted gross estate must be known (except for applying the basis step-up rules under Sec. 1014);
• Less than the entire value of an interest in property includable in the decedent’s gross estate is marital deduction property or charitable deduction property; or
• A partial disclaimer or partial qualified terminable interest property election is made with respect to a bequest, devise, or transfer of property includable in the gross estate, part of which is marital deduction property or charitable deduction property (Regs. Sec. 20.2010-2(a)(7)(ii)).

Furthermore, the special rule applies only if the executor exercises due diligence to estimate the fair market value of the property subject to the special rule and reports on the estate tax return the estimated range of value of the total gross estate in accordance with the instructions for Form 706 (Regs. Sec. 20.2010–2(a)(7)(ii)(B)).

Further complicating the “complete and properly prepared” standard, in the preamble to the final regulations, Treasury and the IRS acknowledged that some errors or omissions made on an estate tax return will be considered minor and correctable. However, the determination of whether an estate tax return is complete and properly prepared will be determined on a case–by–case basis by the IRS. In other words, there is no safe harbor or minimum threshold for deciding when an estate tax return will be deemed to be complete and properly prepared.

IRS examination of DSUE calculations

Sec. 2010(c)(5)(B) provides the IRS with the authority to examine the returns of deceased spouse(s) of the surviving spouse for purposes of determining the DSUE amount available to the surviving spouse even if the statute of limitation for assessing tax with respect to the returns of the deceased spouse has expired. In other words, even though the IRS cannot assess additional estate tax on the estate tax return of the deceased spouse because the statute of limitation for assessing tax has expired, adjustments to the DSUE amount can be made indefinitely.

Estate of Rowland

The outcome of a recent Tax Court case illustrates the importance of strictly complying with all of the requirements necessary to make a valid portability election. The importance of strict compliance is further heightened due to the IRS’s ability to indefinitely challenge the amount of DSUE available to a surviving spouse.

In Estate of Rowland, T.C. Memo. 2025–76, Billy Rowland’s executor attempted to use the DSUE calculated on the estate tax return of Rowland’s spouse, Fay Rowland. Fay Rowland died on April 8, 2016, and Billy Rowland died 21 months later on Jan. 24, 2018. Fay Rowland’s executor secured a six–month extension of time to file her estate tax return, which resulted in a due date for the estate tax return of July 8, 2017. Fay Rowland’s executor mailed the estate tax return to the IRS on Dec. 29, 2017, which was past the extended due date.

On April 22, 2019, Billy Rowland’s estate tax return was timely filed and claimed the DSUE calculated on Fay Rowland’s estate tax return of $3,712,562. The IRS selected Billy Rowland’s estate tax return for examination and determined that his estate was not eligible to claim the DSUE calculated on Fay Rowland’s estate tax return. Even though her estate tax return was filed after the extended due date, it qualified for late filing relief under Rev. Proc. 2017–34, which provided her executor until April 8, 2018, to file the estate tax return and make a portability election. Fay Rowland’s estate tax return was filed before April 8, 2018. However, the IRS determined that even though her estate tax return was timely filed, it was not a complete and properly prepared estate tax return, which is also a requirement for late election relief under Rev. Proc. 2017–34.

The IRS cited two reasons why Fay Rowland’s estate tax return was not complete and properly prepared:

• The return did not provide complete descriptions or valuation information for the property includable in her estate, and
• The estate was not eligible to estimate the value of property under Regs. Sec. 20.2010-2(a)(7)(ii) (i.e., the special rule available for certain marital and charitable deduction property for estates that do not otherwise have a filing requirement other than to elect portability).

Fay Rowland’s estate tax return contained only an estimated gross value of the estate rather than the required itemization and valuation of all property. Although the special rule under Regs. Sec. 20.2010–2(a)(7)(ii) provides for an exception to the requirement to report the value of certain marital and charitable deduction property, the IRS asserted that Fay Rowland’s estate did not qualify for the exception due to the structure of her estate.

The Tax Court first observed that Fay Rowland’s estate tax return was not timely filed by the extended due date of July 8, 2017. However, her estate tax return was filed on or before the later of Jan. 2, 2018, or two years after her date of death (i.e., the late filing relief due date) in accordance with Rev. Proc. 2017–34. In addition, Rev. Proc. 2017–34, Section 4.01(1), requires the estate tax return to be complete and properly prepared in accordance with Regs. Sec. 20.2010–2(a)(7).

The Tax Court concluded that Fay Rowland’s estate tax return was not complete and properly prepared and thus failed to make a valid portability election. As a result, Billy Rowland’s estate could not use Fay Rowland’s unused estate tax exemption to reduce his estate tax liability. The Tax Court arrived at this conclusion because Fay Rowland’s estate tax return did not provide specific valuation information for each property interest and was not entitled to estimate the gross value of her estate.

Key takeaways

The law known as the One Big Beautiful Bill Act (OBBBA), H.R. 1, P.L. 119–21, permanently set the BEA at $15 million (annually adjusted for inflation beginning in 2027). “Permanent” means that the BEA is set at $15 million adjusted for inflation until affirmatively changed. There is no sunset or future date in which the BEA automatically changes to a different amount in the absence of legislative action. However, the current or a future Congress could change the amount of the BEA at any time.

Married couples can be divided into two general categories in deciding whether filing an estate tax return and making a portability election is prudent:

• Those with combined net worth less than $15 million should consider:
  • The professional fees associated with filing the estate tax return and electing portability. Estate tax returns can be expensive and time-consuming to prepare.
  • The remaining life expectancy of the surviving spouse, along with an evaluation of the likelihood that the surviving spouse’s net worth at death will exceed the BEA (adjusted for gifts made during life).
  • The likelihood that the surviving spouse’s own BEA will be reduced by future legislative action, combined with a comparison of the surviving spouse’s estimated net worth at death to proposed adjustments to the BEA. Currently, the amount of the DSUE is not adjusted even if an individual’s own BEA is increased or decreased. As a result, a portability election made when the BEA is $15 million might result in a zero taxable estate for the surviving spouse even if the surviving spouse’s BEA is significantly reduced.
• For those with combined net worth greater than $15 million, a portability election should always be made at the death of the first spouse unless unusual circumstances exist, such as an estate plan that requires charitable bequests to the extent that the estate is otherwise taxable. Even under such an estate plan, a portability election could provide more bequests to noncharitable beneficiaries at the death of the surviving spouse.

Editor

Robert Venables, CPA, J.D., LL.M., is a tax partner with Cohen & Co. Ltd. in Fairlawn, Ohio.

For additional information about these items, contact Venables at rvenables@cohencpa.com.

Unless otherwise noted, contributors are members of or associated with Cohen & Co. Ltd.