Portability of the Estate Tax Exemption: Federal Yes, New York No

Federal law lets a surviving spouse inherit the deceased spouse's unused $15,000,000 exclusion by filing a Form 706. New York offers nothing of the kind. Here is how the election works, what it does not cover, and why married New Yorkers need both a portability return and a credit shelter trust.

Portability is the federal rule that lets a married couple treat their two estate tax exclusions as one pool. When the first spouse dies without using all of his or her $15,000,000 exclusion, the unused portion can be handed to the survivor, who adds it to his or her own. A couple can shelter $30,000,000 from federal estate tax without any trust at all, provided the executor of the first estate files the right form on time.

The trouble for New Yorkers is that the word “portability” has led many families to believe the credit shelter trust is a relic. It is not. New York's exclusion is $7,350,000 per person in 2026, New York has no portability, and the New York exclusion of a spouse who leaves everything outright to the survivor is simply lost. This page explains what the federal election does, how to make it, what it leaves out, and how we combine it with New York planning.

What DSUE is

DSUE stands for “deceased spousal unused exclusion.” It is the part of the first spouse's federal basic exclusion amount that was not used against taxable transfers during life or at death. When the surviving spouse later makes gifts or dies, the DSUE amount is added to the survivor's own exclusion.

Take a couple in Brooklyn. The husband dies in 2026 and leaves everything to his wife. Because everything passes under the unlimited marital deduction, he uses none of his $15,000,000 exclusion, and his DSUE is the full $15,000,000. If his executor elects portability, the wife's federal exclusion becomes $30,000,000: her own $15,000,000 plus his. Her own exclusion continues to be indexed for inflation after 2026; the DSUE amount is fixed at the figure in effect when the husband died. Without the election, the husband's exclusion is gone and the wife has $15,000,000 only.

How to elect portability

Portability is not automatic. It is elected on a federal estate tax return, Form 706, filed for the first spouse to die. The steps are these:

1. File Form 706 within nine months of death

The return is due nine months after the date of death. An automatic six-month extension is available on Form 4768 if it is requested before the original deadline. The election is made simply by filing a complete and timely return; there is no separate election form.

2. File even when no tax is due and no return is otherwise required

This is the step families miss. An estate under $15,000,000 has no federal filing requirement, so no one thinks to file. But a Form 706 that is not filed makes no portability election, and the DSUE is lost. For most New York couples, the portability return is filed solely to make the election.

3. If the deadline was missed, use the five-year relief

Rev. Proc. 2022-32 allows a late portability-only election on a Form 706 filed up to five years after the date of death, provided the estate was not otherwise required to file. The return is marked to indicate that it is filed under the revenue procedure. After five years, relief is uncertain, slow and expensive.

4. Keep the return

The surviving spouse's executor will need the first spouse's Form 706 decades later to prove the DSUE amount. The statute of limitations on the first return stays open for the purpose of examining the DSUE, so a well-documented return matters.

What portability does not cover

The GST exemption

Portability applies to the estate and gift tax exclusion only. The first spouse's $15,000,000 generation-skipping transfer tax exemption is not portable. If it is not allocated to a trust at the first death, it is lost. A family that wants to fund a generation-skipping trust or a dynasty trust with both spouses' GST exemptions needs a trust at the first death; portability alone will not do it.

New York

New York has no portability. The New York exclusion of the first spouse to die is used or lost at that death. A federal Form 706 filed for portability changes nothing on the New York side, and a New York Form ET-706 has no portability box to check. The only ways to use the first spouse's New York exclusion are to leave assets to someone other than the spouse, most often a credit shelter trust, or to make lifetime gifts more than three years before death.

Appreciation after the first death

DSUE is a fixed dollar amount. Assets left outright to the survivor grow inside the survivor's estate. Assets in a credit shelter trust grow outside it. Over a long survivorship, the difference can be larger than the DSUE itself.

Why a New York couple should file the Form 706 anyway

If portability does nothing for New York, and the federal exclusion is $15,000,000 per person, why do we recommend a portability return for nearly every married client with more than about $7,000,000 combined? Because the return is inexpensive insurance against outcomes no one can predict at the first death:

• The survivor's estate may grow. Twenty years of appreciation in a New York City apartment and a brokerage account, plus a life insurance payout, can carry a $7,000,000 survivor well past $15,000,000. The election is made now or never.
• The law may change. The $15,000,000 exclusion is permanent under current law, with no scheduled sunset. Congress can still lower it. A survivor holding a $15,000,000 DSUE is insulated from that risk.
• The survivor may want to make large gifts. DSUE can be used against lifetime gifts, not just at death. A survivor who wants to fund trusts for children, or move assets out of the New York estate more than three years before death, can use the deceased spouse's exclusion first and keep his or her own.
• The cost is modest. A portability-only return for an estate under the filing threshold is far simpler than a full estate tax return, and it is a one-time expense.

The portability return does not replace the New York planning. It sits alongside it. A New York couple with combined assets above $7,350,000 needs a credit shelter trust or a state-only QTIP election to deal with the New York tax, and a Form 706 to preserve the federal DSUE. Both, not either.

Portability versus a credit shelter trust

The step-up row is the one genuine advantage of the outright approach, and it is why we do not put every asset into the credit shelter trust reflexively. Where the family's assets are mostly low-basis and likely to be held until the second death, we weigh the New York estate tax saved (at rates up to 16%) against the capital gains tax the children will eventually pay (23.8% federal, roughly 38.5% combined for a New York City resident). Our page on tax basis covers that analysis; our A/B trust page explains how the trust is drafted.

Remarriage and the “last deceased spouse” rule

A surviving spouse may use the DSUE of his or her last deceased spouse only. That rule has a sharp edge in second marriages. Suppose the widow in our example, holding her late husband's $15,000,000 DSUE, remarries. As long as her second husband is alive, nothing changes; her last deceased spouse is still her first husband. If the second husband dies before her, he becomes her last deceased spouse, and the first husband's DSUE is gone. She is left with whatever DSUE the second husband's executor elects, which may be nothing if he used his own exclusion or if no return is filed.

The planning answer is to use the DSUE before it can be lost. DSUE is applied to lifetime gifts before the survivor's own exclusion. A widow who is about to remarry, or whose new spouse is in poor health, can lock in the first husband's exclusion by making large gifts, for example to a trust for her children, while he is still her last deceased spouse. Those gifts also start the three-year clock for the New York add-back, so they serve both purposes. We discuss lifetime gifting at how gifts save estate tax and the Form 709 that reports them.

Pitfalls

• Assuming the executor will file. The executor of the first estate, often an adult child from a prior marriage, has no personal stake in the survivor's DSUE and may decline to file or simply not know to. Wills for second marriages should direct the executor to make the election.
• Assuming Form ET-706 is enough. A New York return is required when the gross estate exceeds $7,350,000, but it makes no federal election. The Form 706 is a separate filing.
• Missing the five-year window. After the Rev. Proc. 2022-32 period runs, the family is dependent on discretionary relief.
• A non-citizen surviving spouse. The unlimited marital deduction is not available for transfers to a spouse who is not a United States citizen without special drafting, and the annual exclusion for gifts to a non-citizen spouse is $194,000 rather than unlimited. These plans require a different structure from the start.

Our recommendation for married New Yorkers

For a married couple domiciled in New York, we recommend the following as a baseline. First, draft the estate plan around the New York exclusion: a credit shelter trust funded up to $7,350,000 at the first death, or a Clayton-style QTIP trust with the state-only QTIP election, so the first spouse's New York exclusion is never wasted. Second, at the first death, file a federal Form 706 to elect portability of whatever federal exclusion the trust did not use, which for most couples is nearly all of it. Third, revisit the plan if the survivor remarries or the survivor's estate grows, because that is when the DSUE and the three-year add-back both call for action.

For couples comfortably below $7,350,000 combined, a disclaimer-based plan and a portability return at the first death are usually sufficient. For couples above $30,000,000, portability is a footnote; the real work is done with lifetime transfers.

Related Estate Tax Planning Topics

• A/B trust: credit shelter and marital trust – The New York answer to the absence of portability, with a worked $14,000,000 example.
• New York estate tax in 2026 – The $7,350,000 exclusion, the rate table and the Form ET-706 filing rules.
• The New York estate tax cliff – What happens to a survivor's estate that ends up above $7,717,500.
• Generation-skipping transfer tax – The exemption portability leaves behind, and how to allocate it at the first death.
• Spousal lifetime access trust – Using exclusion during life, including a surviving spouse's DSUE, before it can be lost.

Talk to us

If your spouse has died within the last five years and no Form 706 was filed, there may still be time to elect portability. If you are planning now, we will draft documents that preserve both the federal DSUE and the New York exclusion. Call us at 212-233-1233 or email [email protected]. We serve clients throughout Manhattan, Brooklyn, Queens, the Bronx, Staten Island, Nassau, Suffolk and Westchester.