Estate Tax & Portability: How a Form 706 Filing May Save Your Family Millions

Estate Tax & Portability: How a Form 706 Filing May Save Your Family Millions

By Meredith Pender, CPA*

For many affluent families, it is easy to assume federal estate taxes are unlikely to ever become an issue. Under current law (2026), the federal estate tax exemption is $15 million per person, indexed for inflation, allowing a married couple to transfer $30 million to their heirs free of federal estate tax.

However, estate planning is not just about today’s circumstances. It is about creating a plan that remains effective through changing tax laws, market growth, and evolving family needs. History shows that exemption amounts can change dramatically over time, making it important to preserve planning opportunities while they are available. With that in mind, let’s look at how the estate tax works and why filing a simplified Form 706 after the death of a spouse can be such a valuable planning tool even for families well under the exemption amounts.

Understanding the Estate Tax and Why It Matters

At its core, the federal estate tax is a tax on the transfer of wealth at death. While the current exemption allows each individual to transfer up to $15 million free of federal estate tax, assets above that amount may be taxed at rates of up to 40%. As a very simple example, assume your mother, single, has total assets worth $20 million when she dies and leaves it all to you. The first $15 million is free of estate tax, but the last $5 million would trigger an estate tax liability of about $2 million.

Married couples can benefit from an important provision known as the unlimited marital deduction, which allows assets to pass from the first spouse to die to the surviving spouse free of estate tax. That sounds like a solution, but in reality, it is really only a deferral.

While no estate tax is typically due at the first death for a married couple, the deceased spouse’s estate tax exemption is not automatically preserved. Without additional planning, assets may continue to accumulate in the surviving spouse’s estate, potentially exposing more wealth to estate tax at the second death, often when the estate has grown and tax laws may be less favorable. As a result, families with little or no estate tax exposure today may face a very different outcome years or even decades down the road.

A Brief Look Back: Estate Tax Exemptions Have Not Always Been This High

Although today’s $15 million exemption is historically high, the estate tax exemption has changed dramatically over time. In the early 2000s, the exemption was just $675,000. By 2009, it had risen to $3.5 million, only to change again in 2010 before later legislation restored and eventually increased the exemption. The Tax Cuts and Jobs Act of 2017 then doubled the exemption, pushing it above $11 million, and subsequent legislation has taken it even higher to where we are today.

The visual below shows a brief history of the estate tax and some of the major planning points to consider:

The lesson is not to predict where exemption amounts will go next, but rather to recognize that change is inevitable. Estate planning is not a one-time decision but an ongoing process that should adapt as laws, wealth levels, and family circumstances evolve. As we often remind clients, good financial planning is not about predicting the future. It is about preparing for the uncertainty ahead. That principle applies just as much to estate planning as it does to investing, retirement planning, or tax strategy.

Given that uncertainty, planning strategies that preserve flexibility can be especially valuable. One such opportunity is making a portability election, which can allow a surviving spouse to preserve a deceased spouse’s unused estate tax exemption.

The Often Overlooked Opportunity: Portability

Portability allows a surviving spouse to preserve a deceased spouse’s unused federal estate tax exemption, commonly referred to as the Deceased Spousal Unused Exclusion (“DSUE”).

However, portability is not automatic. To preserve the DSUE, a timely Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return generally must be filed within nine months of the decedent’s death. If the election is not made, the deceased spouse’s unused exemption may be lost permanently. In some cases, relief may be available for estates that missed the filing deadline, although obtaining relief can add complexity and cost.

Importantly, when portability is the primary objective and no estate tax is due, the IRS allows certain estates to make a “simplified” portability election that generally requires less information than a traditional taxable estate tax return. While the filing still requires careful preparation, it is often far less burdensome than many families expect.

Although portability may seem like a minor administrative election, the financial consequences of failing to make it can be significant. Consider the following example:

A married couple has a combined net worth of $20 million. When the first spouse dies, roughly half of the assets, or $10 million, are owned by the deceased spouse. Those assets pass entirely to the surviving spouse through the unlimited marital deduction, resulting in no estate tax and no use of the deceased spouse’s federal estate tax exemption. At that moment, it may appear that no further action is necessary because no estate tax is due. In reality, this is when a critical planning decision is made.

If a Form 706 is filed and portability is elected, the deceased spouse’s full $15 million exemption is preserved and transferred to the surviving spouse. If no filing is made, that exemption is forfeited.

Now fast forward to the surviving spouse’s death years later. For simplicity, assume the estate remains worth $20 million, but the estate tax exemption has fallen to $10 million per person.

The outcomes are dramatically different:

• With Portability: the surviving spouse has $25 million of total exemption ($10 million of their own plus $15 million of DSUE). No estate tax is owed.
• Without Portability: the surviving spouse has only their own $10 million exemption available. That leaves $10 million subject to federal estate tax, resulting in approximately $4 million of federal estate tax due assuming a 40% tax rate.

See the graphic below for an illustration of this example:

Same family. Same assets. Same starting point. The only difference is whether a Form 706 was filed after the first spouse’s death.

In this example, that single filing decision determines whether approximately $4 million remains with the family or is paid in federal estate tax. And importantly, this example assumes the estate never grows beyond $20 million. In reality, many surviving spouses live for years after the first spouse’s death, allowing assets to continue appreciating. As a result, the potential benefits of portability may be significantly greater than this example suggests.

The challenge with portability is psychological, not technical. At the first death, there is typically no estate tax due, no immediate financial consequence, and little sense of urgency. But estate planning is rarely about today’s circumstances. Tax laws change, wealth compounds over time, and missed elections can be difficult or impossible to correct later.

Filing Form 706 and electing portability is one of those decisions. It does not require transferring assets, restructuring ownership, or making permanent wealth transfer decisions. Also, the cost of filing is often modest compared to the potential benefit, which can amount to millions of dollars in future estate tax savings.

Don’t Forget About State-Level Estate Taxes Too

This article focuses on the federal estate tax and the portability election. There are actually a number of states that also impose a state-level estate tax that is totally separate from the federal estate tax system. Many of these states have much lower exemptions and different rules around portability (or no portability at all). This is beyond the scope of this article but keep an eye out for a future Bluerock article coming soon about state-level estate taxes – it may actually matter a lot more than the federal estate tax to many families.

Final Thoughts

Estate planning rarely hinges on one dramatic strategy. More often, it is the accumulation of thoughtful decisions made over time. Filing Form 706 to elect portability is one of those important decisions. While it may seem like a minor administrative task today, it can help preserve valuable tax benefits and potentially save a family millions of dollars in future estate taxes.

If you are a surviving spouse or serving as the executor of an estate, evaluating whether a portability election is appropriate deserves careful consideration. A timely Form 706 filing may preserve significant estate tax benefits that otherwise could be lost permanently.

Meredith Pender, Tax Manager

*Licensed, not actively practicing.

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