Estate planning and the federal estate tax will be coming to the forefront as we approach December 31, 2025. Currently, the exemption amount is $13.61 million per person. However, the estate laws included in the Tax Cut and Jobs Act of 2017 are set to expire on December 31, 2025, sunsetting back to the laws in effect pre-2017. This includes reducing the lifetime federal estate and gift tax exclusion by approximately half.

As you know, the federal government levies the estate tax on the amount of assets transferred to your heirs at your death. Assets that pass between spouses transfer tax-free at the death of the first spouse and then become taxable at the second spouse’s death. Everyone has a lifetime exclusion, allowing them to pass a certain amount of assets tax-free at their death before the estate tax is incurred. The current federal estate tax rate is 40% on all amounts over the lifetime exclusion.

How the Estate Tax Exclusion Has Grown

A brief history of the last 15 years of the estate tax exclusion shows how the lifetime exclusion has grown substantially, starting with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (also known as the 2010 Tax Relief Act).

• The 2010 Tax Relief Act increased the federal estate tax exclusion to $5 million (to be indexed annually for inflation).
• The exclusion amount increased to $5.49 million by 2017.
• Then, in 2017, the amount doubled to $11.7 million as part of the Tax Cut and Jobs Act of 2017 (TCJA).
• The exemption amount in 2024, again indexed for inflation, is $13.61 million for each person.

However, the exclusion reverts to the pre-2017 amount of $5.49 million on January 1, 2026, at which time the TCJA expires (which, when indexed for inflation, is expected to be $7 million).

How Portability of the Lifetime Exclusion Works

An important but under-the-radar aspect of the 2010 Tax Relief Act was the introduction of the portability of the lifetime exclusion between spouses. As noted above, assets pass tax-free between spouses. Portability allows the surviving spouse to utilize the deceased spouse’s unused estate tax exclusion, thus increasing the amount the surviving spouse can transfer at their death, tax-free. Portability helps alleviate any wasted exclusion and helps create more estate planning flexibility.

How to Select Portability

Portability is an election the surviving spouse must make on the deceased spouse’s estate tax return (Form 706). Therefore, even though the first spouse to die may not have a taxable estate because their assets pass tax-free to the surviving spouse, it is recommended that you file the estate tax return to opt to port the deceased spouse’s exclusion. For any spouse that dies before January 1, 2026, they can port the entire $13.61 million. As long as the election is made before that date, the ported exclusion amount will not be adjusted when the law reverts to an exemption of $7 million, thus saving $6.61 million of the exclusion.

An example of portability follows:

A married couple with $10 million of assets each, or a gross estate of $20 million, would have a lifetime exclusion of $13.61 million each, or a total of $27.62 million.

If the first spouse dies in 2024, their $10 million passes tax-free to the surviving spouse without using any of the lifetime exclusion.

If portability were not elected on the federal estate tax return, the surviving spouse would have a gross estate of $20 million but only a lifetime exclusion of $13.61 million. Therefore, they have a taxable estate of $6.39 million and would owe a tax of $2.56 million ($6.39 million * 40%).

If portability was selected on the first spouse’s estate tax return, the surviving spouse would still have a gross estate of $20 million but would have a federal exclusion available of $27.2 million, and their estate would pass to their heirs tax-free. By porting the exclusion, they save $2.56 million in estate tax.

It should be noted that the federal estate tax exclusion is also the lifetime gift tax exclusion, meaning that you can gift up to the federal lifetime exclusion of $13.61 million before your death. The amount of any gifts in a year over and above the annual gift tax exclusion ($18,000 in 2024) would still be tax-free but would utilize a portion of the estate tax exemption. Any gift amount exceeding the annual gift tax exclusion is also reported on Form 706.

The Bottom Line

The ability to port the unused federal estate exclusion can significantly impact the amount of assets passed to your heirs. With the law scheduled to change in a few years, this year is an excellent time to review your estate plan with your financial planner and estate planning attorney.