We occasionally write about estate tax issues when a rule comes up that people have heard of but do not fully understand. Portability is one of those rules.
Many people are unsure how estate tax works. Some assume everyone pays it. Others assume it only applies to the ultra-wealthy. In reality, estate tax is not something people think about until they have to – it’s just not a topic that holds much fascination for most people.
That is part of why portability can get overlooked. It sounds dry and technical – and it is – but the basic idea is not complicated, and in some families it can make a real difference when everything is eventually sorted out.
We will start with federal estate tax rules, because portability is a federal law. Then we will briefly look at how Maryland law fits in. To keep the examples simple and easy to follow, we will use round numbers and avoid detailed tax calculations, which can change over time and tend to distract from how the rules actually work.
In Simple Terms
Portability is a federal estate tax rule that allows a surviving spouse to use a deceased spouse’s unused estate tax exemption.
The estate tax exemption is the amount a person can pass on at death before any federal estate tax applies. Here, “amount” means the total value of what a person owns at death -not just cash, but real estate, investments, business interests, and other property.
Think of it as a line the tax law draws: stay under the line and there is no federal estate tax; go over it and only the amount above the line may be taxed.
A simple example
Assume the exemption is $5 million (its not, its actually much closer to $14 million), meaning the first $5 million of an estate is not subject to federal estate tax.
If the first spouse dies owning $3 million and everything passes to the surviving spouse, only $3 million of the $5 million exemption was used. The remaining $2 million was not used. If portability is elected, that unused $2 million can carry over to the surviving spouse.
Years later, the surviving spouse dies with an estate worth $7 million. With portability, she has her own $5 million exemption plus the $2 million carried over, for a total of $7 million, so her entire estate would pass without federal estate tax. Without portability, she has only her own $5 million exemption, and the extra $2 million may be subject to federal estate tax.
And that is the point of portability: it determines whether that unused portion of the first spouse’s exemption is preserved or lost.
Why Portability Matters
In many families, everything passes to the surviving spouse when the first spouse dies. Estate plans are often set up that way, and the tax law reflects that by allowing transfers without tax at the first death (often called the marital deduction).
Think about a typical situation. A married couple owns a home, has savings and investment accounts, and maybe a retirement account. Over time, those assets can add up – often more than expected.
When the first spouse dies and everything passes to the survivor, the marital deduction means there is usually no tax due. It can look like the estate plan worked exactly as intended, and paying no tax can make it feel like everything was handled perfectly.
Because it worked once, it is easy to assume it will work the same way again later. But this is exactly when portability matters most.
If nothing is done at that point, the unused exemption can be lost. When the surviving spouse later dies, the marital deduction no longer applies because there is no longer a spouse to leave everything to, so estate tax may be due if the estate is above the exemption amount.
How Portability Works
So how does this work in practice?
When the first spouse dies, the estate determines how much of that spouse’s exemption was actually used. Any unused portion can be transferred to the surviving spouse, but only if portability is properly elected.
Portability does not happen automatically. To preserve the unused exemption, a federal estate tax return must be filed on time, even if no federal estate tax is owed.
Timing Matters
The timing of that filing matters more than people expect.
In general, the federal estate tax return is due nine months after death, with a six-month extension available. In the months after a death, filing an estate tax return may not feel urgent, especially if no tax is due. That is exactly why it gets overlooked.
If the return is not filed on time, the unused exemption may be lost.
Maryland Estate Tax
So far, we have been talking about federal law. Maryland has its own estate tax, and the rules are not identical.
Like federal law, Maryland has its own exemption amount, which you’ll remember is the amount that can pass without paying estate tax.
Also like federal law, Maryland allows an unlimited marital deduction, which means assets passing to a surviving spouse are generally not taxed at the first death. But that does not eliminate state estate tax, rather it usually just delays it.
When the surviving spouse later dies, all of the assets – both what the surviving spouse already owned and what they inherited – are combined into one estate. If that total exceeds Maryland’s exemption, state estate tax may be due at that point.
Like federal law, Maryland does have portability, and the filing rules are interpreted in a similar manner.
Limits of Portability
Portability is helpful, but it has limits.
For example, it does not protect future growth. If the surviving spouse inherits assets and those assets increase in value over time, that increase is still part of the estate and may be subject to tax later.
So if a surviving spouse inherits assets worth $5 million and those assets grow to $8 million over time, the full $8 million is included in the estate. Even if portability preserved the first spouse’s unused exemption, that growth can still push the estate above the available exemption amount.
That is one reason some estate plans use trusts – to try to limit how much future growth is included in the surviving spouse’s estate.
The Practical Takeaway
Portability is easy to overlook because nothing seems to be at stake when the first spouse dies. There may be no tax bill, and everything may feel straightforward.
But sometimes the most important decision at that point is not about who receives what; instead it is about whether the right return gets filed before the deadline passes.
Closing Thought
Portability is not the most exciting topic in estate planning. But it is one of those rules that can matter later, often in ways families do not expect.
By the time that becomes clear, the opportunity to preserve the unused exemption may already be gone.
If you are helping administer an estate after the death of a married person, it may be worth confirming whether a portability election should be made. It is a time-sensitive step and much easier to address now than to try to fix later.