Minimizing Estate Taxes with Portability and Gifting

Overview

Portability and gifting are two of the most commonly used, legal strategies to reduce federal estate tax exposure and improve the efficiency of wealth transfer. Portability preserves unused federal exclusion from a deceased spouse for use by the surviving spouse; gifting removes value from your estate during life using the annual exclusion and the lifetime unified credit. When combined with trusts and other planning tools, these strategies can reduce or eliminate estate taxes for many families.

This article explains how portability and gifting work, what you must file and when, practical trade-offs (including basis and liquidity effects), and common implementation mistakes to avoid. It also includes practical steps you can take now and links to deeper discussions on specific techniques.

Sources and further reading: IRS estate tax and gift tax guidance (see IRS publications and forms: About Form 706 and About Form 709), and the Consumer Financial Protection Bureau on estate planning. (IRS: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax ; IRS: https://www.irs.gov/businesses/small-businesses-self-employed/gift-tax)

How portability works (practical rules and timing)

• The basic idea: When one spouse dies, any portion of that spouse’s federal basic exclusion amount that is unused can be passed to the surviving spouse as the Deceased Spousal Unused Exclusion (DSUE). The surviving spouse can add the DSUE to their own exclusion when computing estate tax on their future death.
• Election and timing: To claim portability for federal estate tax purposes you generally must file IRS Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return) within nine months of the date of death. A six‑month extension of time to file is available by timely requesting an extension; without filing, the DSUE is lost. (See IRS: About Form 706.)
• What portability applies to: Portability transfers the unused federal basic exclusion amount only. It does not transfer unused generation‑skipping transfer (GST) exemption by default, and it does not affect state estate or inheritance taxes unless the state specifically recognizes portability.
• Practical note from practice: In my experience, many couples benefit most when the first death reports are prepared by an estate professional who calculates whether portability should be elected — filing Form 706 to preserve future sheltering is low-cost compared with the tax savings at stake.

See our dedicated explainer for technical details: What is Portability of the Estate Tax Exemption? (internal resource).

How gifting reduces estate taxes (annual exclusion, lifetime credit, and reporting)

• Annual exclusion gifts: Each donor can give a tax‑free gift up to the annual exclusion amount per recipient each calendar year without using any lifetime exemption or filing a gift tax return. The annual exclusion amount is indexed for inflation and can change year to year; consult the IRS for the current figure. (IRS: Gift Tax)
• Lifetime gifts and Form 709: Gifts above the annual exclusion reduce your lifetime unified credit (the same pool used for estate tax exemption) and generally require filing Form 709 (United States Gift (and Generation‑Skipping Transfer) Tax Return), even if no gift tax is owed. Form 709 is filed by the donor.
• Basis consequences: Be mindful that gifts of appreciated assets shift your income tax basis to the donee (carryover basis). If the asset would otherwise receive a step‑up in basis at death, gifting it during life can create future capital gains exposure for the recipient. This trade‑off is often central to whether to gift now or bequeath later.

For implementation ideas and how gifting can be structured, see our article on Gifting Strategies to Reduce Estate Tax Exposure (internal resource).

How portability and gifting work together (strategies and examples)

• Preserve shelter first, then reduce estate size: A common practical sequence is to elect portability on the deceased spouse’s return to preserve the DSUE, then use annual or lifetime gifting and targeted irrevocable transfers to reduce the surviving spouse’s eventual taxable estate.
• Married couples can split gifts: Spousal gift‑splitting lets a married couple treat a gift as made half by each spouse so that a larger effective annual exclusion per donee is available — but gift‑splitting requires a Form 709 election in the first year a splitting election is made.
• Trust coordination: Irrevocable trusts such as Irrevocable Life Insurance Trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), or Spousal Lifetime Access Trusts (SLATs) remove asset values from an estate while keeping some flexibility. Portability is useful when couples choose not to use certain irrevocable strategies but still want potential double‑exemption sheltering for the surviving spouse.

Illustrative example (conceptual): A couple decides against placing a portfolio into an irrevocable trust but still wants to capture both spouses’ federal exclusions. When the first spouse dies, the executor files Form 706 to elect portability and preserve the DSUE. Over the next decade the surviving spouse makes annual exclusion gifts to children and funds an ILIT for life insurance. The estate at the surviving spouse’s death is therefore smaller (due to prior gifts) and also benefits from the preserved DSUE — a combination that lowers or eliminates federal estate tax.

Trade-offs and common pitfalls

• Donor versus beneficiary tax: Remember that removing an asset from your estate by gifting can increase taxable gains for the recipient if the asset is sold later (carryover basis). For highly appreciated assets, the step‑up at death can be a powerful tax benefit to heirs.
• Portability is an election, not automatic: If the executor fails to file Form 706 on a timely basis (or fails to request a timely extension), the surviving spouse may permanently lose the DSUE. This is one of the most frequent errors I see in practice.
• State taxes: Several states impose their own estate or inheritance taxes with lower thresholds than the federal exemption and may not recognize portability. Always check state law and plan accordingly. See our guide: How State Estate Taxes Differ from Federal Estate Taxes (internal resource).
• GST exemption: Portability does not automatically transfer a deceased spouse’s GST exemption — careful trust drafting and separate planning is needed for generation‑skipping strategies.
• Liquidity: Paying federal estate taxes can require liquid assets (cash or life insurance). Even when the estate is sheltered, illiquid estates can face administration challenges.

Practical, actionable checklist

1. Review beneficiary designations, wills, and trusts immediately after a death — beneficiary designations can override wills.
2. Decide whether to file Form 706 within nine months to elect portability; consider requesting the six‑month extension if needed. (IRS: About Form 706)
3. If you plan gift transfers, keep clear records and file Form 709 for gifts that exceed the annual exclusion (or for gift‑splitting elections). (IRS: About Form 709)
4. Evaluate whether gifting an appreciated asset is best, considering loss of step‑up in basis for heirs.
5. Coordinate portability and gifting with trust funding and life insurance strategies to ensure liquidity and equalization among heirs.
6. Revisit the plan after major life events (marriage, divorce, births, moves between states, significant market appreciation, or legislative changes).

When to engage professionals

• You should consult an experienced estate planning attorney and a tax advisor if you have a blended family, hold complex assets (closely held business, partnership interests, concentrated stock positions, or real estate), or if your estate may approach or exceed the current federal or state exemption(s).
• Executors typically work with counsel and accountants to prepare Form 706 and decide whether portability election is appropriate. This is common practice because calculating the DSUE and the potential tax savings requires accurate valuations and tax forecasting.

Quick answers to common questions

• Is portability automatic? No — the executor must timely file Form 706 (or obtain an extension) to elect portability.
• Will portability protect me from state estate taxes? Not necessarily — some states have different rules or no portability; check your state law.
• Should I gift appreciated property to avoid estate tax? It depends. Gifting reduces estate size but may increase capital gains for recipients; consider whether heirs need a step‑up in basis and weigh that against immediate estate tax savings.

Final takeaway and next steps

Portability and gifting are powerful, complementary tools for minimizing federal estate taxes, but they come with timing, filing, and tax basis trade‑offs that matter. The two most common, avoidable mistakes are (1) failing to elect portability by filing Form 706 on time after the first spouse’s death, and (2) making large lifetime gifts without considering the loss of step‑up in basis and state tax consequences.

If you want practical templates, filing checklists, or examples tailored to a particular estate composition, consult an estate planning attorney and tax advisor. For more background on portability mechanics see What is Portability of the Estate Tax Exemption? and for gifting tactics review Gifting Strategies to Reduce Estate Tax Exposure.

Professional disclaimer: This article is educational and does not constitute legal, tax, or financial advice. Rules and numeric limits for the federal exclusion amount and annual gift exclusion are adjusted periodically; check the IRS website or consult a qualified advisor for current figures. (IRS: https://www.irs.gov/ ; CFPB: https://www.consumerfinance.gov/consumer-tools/estate-planning/)