Diane and Jack visit with their estate planning attorney to update their estate planning documents. The attorney suggests revisions to their wills since their current wills are very old and there have been many law changes since their execution. He explains that they don’t need complicated estate tax planning within their wills because "portability" will accomplish all of their goals. Portability, made permanent with the passage of the American Taxpayer Relief Act of 2012, allows that if the first spouse to die doesn’t use all of his federal estate tax exemption, any unused exemption can be "ported" over or transferred to the surviving spouse for his or her use during their lifetime, or upon death. The attorney also explained they won’t have to worry about dividing assets equally between the two of them. In fact, they can continue to own their assets in joint tenancy. This is good news to Diane and Jack since they own most of their assets in joint tenancy or with each other as a beneficiary on IRAs and nonqualified annuities. This is simpler than if they planned to use their marital deduction/credit shelter (A/B) trusts.

Let’s assume that Jack dies first and half of the $24 million, or $12 million, will be included in his taxable estate. Since all assets are held in joint tenancy with Diane or with her named as the beneficiary on his life insurance and IRA, Jack does not use any of his estate tax exemption but uses the unlimited marital deduction to eliminate all estate tax. Since he didn’t use any of his $13.99 million (in 2025) exemption, Diane, as his executor, must file an estate tax return on behalf of Jack in order to transfer his unused exemption to her. So now, when she dies ten years later, Diane will have her exemption (unless Congress changes it, that is estimated to be $7.5 million in 2026 and $10 million in 2034 after the sunset provisions of the Tax Cuts and Jobs Act of 2017 in 2026) and Jack’s $13.99 million exemption to shelter her estate from estate taxes. However, Jack’s "ported" exemption does not get the benefit of inflation adjustments. Additionally, since all of their assets were owned jointly or had Diane as a beneficiary, all assets will now be owned and managed by her individually. There is no need to have separate trusts own the assets.

For capital gain tax purposes let’s assume that Diane and Jack live in a community property state, like California. This means that Diane will get a 100% step up in income tax basis in the assets at Jack’s death. In turn, at her death, the children will also get a full step up in basis in those assets. Note that in separate property states, the basis step up at Jack’s death would only apply to 50% of the property value.

Let’s look at how this planning plays out. The estate tax exemption is estimated to be $10 million in 2026, and asset values are assumed to double from 2025 to 2035.

Portability can be a relatively simple way for a married couple to plan for estate taxes. It is simpler to manage than creating marital deduction/credit shelter (A/B) trusts, and there is no need to transfer assets into revocable trusts. But, relying on portability does have some risks. Some of those risks are mentioned below:

• If assets appreciate to be greater than the both spouses’ exemptions (ported exemption and survivor’s exemption), there will be an estate tax at the survivor’s death. A credit shelter trust will shelter assets and the appreciation from estate tax at the first death and at the survivor’s death.
• Many states have their own estate tax but do not have portability, so if assets are left directly to the survivor, the state exemption will be lost.
• A credit shelter trust provides creditor protection for the surviving spouse, whereas portability does not.
• If the surviving spouse is unable to manage all the assets, a credit shelter trust can provide professional management in the form of a professional trustee. Portability puts the asset management in the survivor’s hands.
• If the surviving spouse remarries and the new spouse predeceases, there is the potential to lose that ported exemption amount.
• The ported exemption does not increase with inflation, whereas the survivor’s exemption does.
• The generation-skipping transfer (GST) tax exemption is not portable, so there is a potential loss of its use upon the first spouse’s death.

As you can see, in some situations portability may provide the best outcome for a married couple’s estate planning. But, depending on the circumstances, it may be more beneficial to plan with marital/credit shelter (A/B) trusts. That is why it is important to discuss this with your estate planning attorney.