Portability and the return nobody files

The portability election is one of the more valuable provisions available to married couples, and it is lost routinely because claiming it requires a filing nobody thought was needed.

How it works

Each person has a federal estate tax exemption. Historically, any portion unused at death was simply lost.

Portability allows a surviving spouse to add the deceased spouse's unused exemption to their own.

The practical effect is that a married couple can shelter roughly double the individual amount without any trust planning.

The election requirement

This is where the failure occurs.

Portability is not automatic. It must be elected on a timely filed federal estate tax return for the first spouse's estate.

That return is otherwise not required where the estate is below the filing threshold — which is the situation for the overwhelming majority of estates.

So a family with a modest first estate sees no reason to file, does not file, and the unused exemption is forfeited permanently.

Years later, if the surviving spouse's estate has grown, or if the exemption has been reduced by legislation, the loss becomes apparent at exactly the point when nothing can be done.

The deadline and the relief

The return is due within a period after death, extendable.

Recognising how frequently the election was being missed, the tax authority has provided a simplified procedure allowing a late election in defined circumstances, with an extended window for estates not otherwise required to file.

The available period under that relief has been extended more than once.

Which means a surviving spouse who did not file may still be able to, and it is worth checking rather than assuming the opportunity has passed.

The relief applies only to estates below the filing threshold; estates that were required to file and did not are in a different position.

Why it is worth doing anyway

Even where the combined estate is currently well below the threshold, several arguments favour filing.

Assets grow. A surviving spouse who lives another twenty-five years may have a considerably larger estate.

The exemption is scheduled to change. Current law provides for a reduction, and legislation is uncertain.

An estate comfortably below today's threshold may not be below a future one.

The cost is modest relative to the potential benefit, and the return in these circumstances is generally simplified.

It establishes values, which is useful for basis purposes independently of estate tax.

The limitations

Only the last deceased spouse's exemption is available. A surviving spouse who remarries and is widowed again cannot stack exemptions from both.

Portability does not apply to the generation-skipping transfer exemption, which must be preserved by other means.

Growth is not sheltered. The ported amount is fixed at the first death. Assets in a credit shelter trust, by contrast, grow outside the survivor's estate.

For families expecting substantial appreciation, trust planning may still be preferable.

Most states do not offer portability at state level, which means separate planning may be needed where a state estate tax applies with a lower threshold.

Portability versus credit shelter trusts

The traditional alternative.

A credit shelter trust holds an amount up to the exemption at the first death, providing for the surviving spouse while keeping the assets and their future growth outside the survivor's estate.

Advantages over portability: future growth is sheltered, assets are protected from the survivor's creditors and from a subsequent marriage, and the ultimate beneficiaries are fixed — which matters in blended families.

Disadvantages: complexity, administration cost, and the loss of a second basis adjustment on assets held in the trust at the survivor's death.

That last point has become more important as estate tax has become less relevant for most families and capital gains treatment more so.

Many plans now use a disclaimer approach, allowing the surviving spouse to decide after the first death whether to fund a trust based on circumstances at the time.

General information only, not legal or tax advice. Deadlines, thresholds and relief procedures change — consult a qualified estate attorney promptly after a spouse's death.