Porting the Estate Tax Exemption – Should You?

In 1916, the U.S. enacted a tax on estates. And also in 1916, the U.S. established the first exemption from estate tax for estates below $40,000. It has been a wild ride ever since. In 1993, the exemption from estate tax was $600,000. In 2002 the exemption was $1,000,000. In 2024 the exemption is $13,610,000. And in 2026, the estate tax exemption drops to $5,000,000 adjusted for inflation.

In 1993, standard planning for married couples meant setting up an irrevocable trust upon the death of the first spouse to die because if you didn’t use the deceased spouse’s exemption, the exemption was lost. Use it or lose it. In 2011 that changed when Congress allowed the surviving spouse to claim the unused exemption of the deceased spouse. This is called portability or porting the deceased spouse unused exemption (DSUE).

In 2011, the exemption from estate tax was $5,000,000. A spouse dying in 2011 with net assets of $3,000,000 flowing into the irrevocable tax planning trust had an additional $2,000,000 in exemption that could be claimed by the surviving spouse. To port the exemption requires filing an estate tax return (IRS Form 706). Two questions arise. Should you port the exemption? Should you skip the traditional irrevocable trust upon the first spouse’s death?

Perhaps the only downside to porting the exemption is cost. Yes, probably port the exemption because it gives the surviving spouse options. Between the roller-coaster ride of changing exemption amounts and rising inflation, that unused exemption could mean millions to your heirs.

The tougher question is whether to set up the irrevocable tax planning trust upon the death of the first spouse to die or forgo the trust entirely relying on porting the exemption. In a perfect world, yes, still set up the irrevocable tax planning trust. Porting the DSUE has limitations. The DSUE is not indexed to inflation. Any future increase in trust value is not subject to estate tax when the second spouse dies. Porting the DSUE does not include porting the exemption from generation skipping transfer tax (GSTT). The irrevocable trust provides asset protection to the surviving spouse and ensures that your wealth is passed on to the heirs of your choice.

But it is not a perfect world. As a young estate planning lawyer, very few of our clients passed away and even fewer with irrevocable tax planning trusts. Now, after 30 years of practice, we are setting up more irrevocable trusts with the surviving spouse as trustee. With those trusts comes trust administration expense and the obligation of the surviving spouse to properly account. Taxation of irrevocable trusts is complex requiring a good team of professionals, which also comes at a cost.

Porting the unused exemption of the first spouse to die is probably a good idea. Whether to create or forgo the tax planning trust is a more difficult question. We still prefer to see the tax planning trust created. However, it may not be the right decision for everybody.