Estate Planning Pro Tip for Married Couples: Don’t Overlook Portability
In this article:
- Understanding Portability and the Estate Tax Exemption
- The Role of Step-Up in Basis
- The Role of Trusts in Estate Planning
- Steps to Protect Your Estate
- How We Help
Estate planning ensures that wealth transfers happen efficiently with minimal tax exposure. One of the most powerful tools in the estate planning toolkit for married couples is portability, which allows a surviving spouse to inherit any unused federal estate tax exemption from their deceased partner. It is a concept that can significantly reduce estate tax liability yet is often overlooked.
In 2025, each individual has a $13.9 million exemption, meaning assets up to that amount can pass tax-free to their heirs. If this full exemption is not used at one’s death, portability lets their surviving spouse carry it forward, potentially doubling their exemption.
Consider a spouse who passes away in 2025 without using any of their $13.9 million exemption. In this case, the surviving spouse may add that $13.9 million to their own exemption. Even if the federal exemption later decreases to $6 million, the surviving spouse would still retain the full $13.9 million inherited from their spouse, resulting in a total exemption of $19.9 million. This kind of foresight can translate into significant tax savings for the next generation.
Understanding Portability and the Estate Tax Exemption
Portability provides a valuable opportunity within the tax code to benefit families, but it requires careful attention to detail. To take full advantage of portability, the executor of the deceased spouse’s estate must file IRS Form 706, the federal estate tax return. While this form is often associated with larger estates, it is also required for smaller estates if portability is desired. Failure to file this form can result in the surviving spouse losing the opportunity to inherit the unused exemption, potentially leading to significant estate tax liabilities in the future. AAFCPAs helps clients ensure this process is managed correctly, protecting family wealth from unnecessary tax burdens.
If your estate is at risk of falling near the exemption threshold, AAFCPAs advises that clients consider the benefits of portability. Since there is a possibility that the exemption could decrease after 2025, planning now could help you maximize the benefits of portability before any changes take effect. Waiting to address this after the exemption drops could mean missing out on opportunities for significant tax savings.
The Role of Step-Up in Basis
Beyond estate tax considerations, portability can also affect income tax planning. This is because, when an individual passes away, their assets generally receive a step-up in basis. This means assets are revalued at their fair market value at the time of death, eliminating capital gains on any appreciation that occurred during their lifetime.
For instance, if an investor purchased stock for $100 per share and it appreciated to $300, selling it would typically trigger capital gains tax on the $200 difference. However, if the individual dies holding that stock, its cost basis resets to $300 for the heir, effectively erasing the taxable gain.
This step-up in basis occurs at the first spouse’s death, but estate planning should also ensure a second step-up at the surviving spouse’s death. This is where trust structures become important.
The Role of Trusts in Estate Planning
Traditionally, estate plans used an A-B trust structure to shelter assets from estate tax. A portion of the estate would go into a family trust (often called a bypass or credit shelter trust), and the rest into a marital trust. While this approach was necessary when the exemption was much lower, it may now lead to unintended tax consequences, particularly in the form of missed income tax savings.
This is because assets placed in a family trust do not qualify for a second step-up in basis when the surviving spouse dies. So any appreciation between the first and second death could be subject to capital gains tax when sold. In many cases, if the total estate is well below the federal exemption threshold, it may be beneficial to structure the estate so all assets remain eligible for a second step-up in basis at the surviving spouse’s death.
Steps to Protect Your Estate
Given changes in exemption levels over the years, many estate plans created under prior laws may no longer provide optimal tax benefits. Plans designed 10 or more years ago often include trust structures that were necessary at the time but could now result in higher overall taxes.
AAFCPAs advises that clients review their estate plans, particularly if they have not done so in the past five years. Ensuring that your strategy aligns with current tax laws may help minimize both estate and income taxes, preserving more wealth for future generations. Given the exemption may decrease in 2026, it may be wise to consider planning today, with the option to file a gift tax return by October 15, 2026. This allows you to implement the portability strategy, ensuring that you do not lose out on any potential exemption benefits.
How We Help
At AAFCPAs and AAF Wealth Management, we understand that wealth management goes beyond numbers; it’s about securing your legacy and safeguarding your future. Our team of tax advisors, wealth managers, and estate planners work together to create strategies that help you minimize tax liabilities, preserve your wealth, and maximize opportunities for future generations. Whether navigating complex estate planning needs or looking to optimize your tax strategy in the face of changing laws, we provide the insight and resources needed to make informed decisions.
We specialize in helping clients with high-net-worth estates and sophisticated financial needs, providing a holistic approach to ensure every facet of your financial life is managed seamlessly, from tax-efficient giving strategies through business succession. By aligning your goals with strategic financial planning, we empower you to achieve long-term success while protecting what matters most.
These insights were contributed by Joshua England, LLM, Esq., Partner & Tax Attorney and Daniel Seaman, CPA, Tax Partner, AAF Wealth Management. Questions? Reach out to our authors directly or your AAFCPAs Partner. AAFCPAs’ blog offers a wealth of resources related to Personal Financial Planning. Subscribe to get alerts and insights in your inbox.
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