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A Costly Oversight in Portability Planning

Not all estate planning mistakes involve poor investments or forgotten documents, sometimes it’s simply a matter of incomplete paperwork. In one recent case, a married couple’s heirs were hit with over $1.5 million in unexpected estate taxes due to an avoidable oversight when filing for estate tax portability.

Here’s how it happened.

Portability: A Powerful, but Procedural, Tool

Portability allows a surviving spouse to claim the unused portion of their deceased spouse’s federal estate tax exemption, known as the Deceased Spousal Unused Exclusion (DSUE), by filing IRS Form 706. This effectively doubles the couple’s combined exemption.

In our example, “James” passed away with an estate well below the exemption threshold at the time. His wife, “Linda,” wanted to preserve his unused exemption for her future estate. She filed the required estate tax return, but only in a very general way, listing a total estate value rather than providing detailed valuations for each asset. That omission rendered the portability election defective and disqualified her estate’s unused exclusion.

When Linda passed years later, her estate, valued in excess of the exemption, could not use James’s unused exclusion. The result: an unnecessary seven-figure tax bill for their children.

Why This Mistake Was So Costly

• Estate tax rates are steep, up to 40%, so losing any portion of the exemption can be extremely expensive.
• James’s unused exemption was worth millions in potential tax savings, but only if claimed correctly.
• The current federal exemption is $14.99 million per person in 2025 and will increase to $15 million in 2026, but even a high exemption is useless if the claim is invalid.

Lessons for Estate Planning

1. Promptly Seek out legal advice to determine the need File for Portability
   Even if the estate is under the exemption amount, filing preserves the unused exemption for future use. Circumstances can change; asset growth, inheritance, or changes in the law can push an estate over the limit. Filing is inexpensive insurance.
2. Detail Matters
   Form 706 requires itemized asset values, not just totals—especially when there are beneficiaries other than a surviving spouse.
3. File Timely and Correctly
   Generally, to elect portability of the deceased spousal unused exclusion (DSUE) amount to a surviving spouse, the executor of the decedent’s estate must file Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) Form 706 timely. The typical due date is 9 months after death, with a 6-month extension by filing Form 4768.   For estates not required to file Form 706 based on value, a simplified method allows a late portability election. This involves filing a complete Form 706 by the fifth anniversary of the decedent’s death. The Form 706 must include the statement “FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)” at the top. It is important to note that the 5-year extension is only for estates not otherwise required to file Form 706.  Estates required to file Form 706 must make the election on a timely filed return (within the 9-month or 15-month extended deadline). If both deadlines are missed, relief may be sought through a letter ruling under § 301.9100-3, which is more complex and involves a user fee.
4. Use Additional Planning Tools
   Portability is valuable, but it may not address state estate taxes or generation-skipping concerns. Consider trust-based strategies, like A/B or credit shelter trusts, for added protection.
5. Review Your Plan Regularly
   Laws change, exemptions shift, and your financial picture evolves. An estate plan should be reviewed every few years to ensure continued protection.

Final Thoughts

Portability can save families millions, but only if executed correctly. Filing Form 706 is not a formality, it’s a technical process that demands precision. An error in asset reporting or a missed deadline can erase the very benefits you intended to preserve.

At Botti & Morison, we can assist in guiding clients through every step of the process, ensuring filings are complete, accurate, and strategically integrated into your broader estate plan. Don’t leave your heirs with an unnecessary tax bill. Protect your legacy by getting the details right today.

Thanks for reading. Christopher E. Botti, Esq., Certified Specialist in Estate Planning, Trust and Probate Law.

This blog is for informational purposes only and does not constitute legal advice. Every situation is unique, and you should consult with a qualified attorney for advice regarding your specific circumstances.