The One Big Beautiful Bill Act (OBBB) made the estate and gift tax lifetime exemption permanent, which likely comes as good news for taxpayers with large estates. The Tax Cuts and Jobs Act (TCJA) doubled the exemption but added a sunset at the end of 2025.

Instead, the OBBB increased the federal estate and gift tax exclusion to $15 million per person, or $30 million for married couples, effective January 1, 2026. Estates exceeding the lifetime exemption will be subject to the 40% estate tax. On top of this generous amount, the IRS also allows for portability of the exemption between spouses – an important consideration in estate planning.

Although the OBBB’s changes to the estate and gift tax exclusion were made permanent, in this case, the definition of “permanent” is “permanent until changed.” While the increase in the exemption is good news, strategic estate planning shouldn’t be ignored.  Your state of residency should also be considered.  Twelve states and Washington, D.C., have estate taxes, and their exemption amounts can be much less than the federal exemption.

What is the Lifetime Exemption?

The lifetime exemption refers to the amount the IRS allows you to exclude from your gross estate when calculating your estate tax. This exemption means that should both spouses pass away in 2026, they have the potential ability to pass on $30 million to their heirs tax-free.

However, this amount can be reduced by certain gifts given during your lifetime. For example, gifts given to any one person (other than your spouse) over $19,000, applicable for the tax years 2025 and 2026, will reduce the lifetime exemption by the value of the gift over $19,000. The payment of medical and tuition expenses is excluded from gifts when paid directly to the providers and educational institutions.

Where Does Portability Come into Play?

Prior to 2010, any amount of the lifetime exemption that went unused by an individual’s estate was simply lost. A large component of estate planning involves married couples trying to split the ownership of the estate’s assets as evenly as possible to maximize their exemptions.

For example, say the lifetime exemption is $3 million, and a married couple had a combined $8 million estate. The wife passed away first, with only $2 million of those assets in her name. Her assets would be sheltered by her lifetime exemption, but she would lose the $1 million exemption amount that went unused.

When her husband passes with $6 million in assets, he would only be able to shield $3 million of his assets and the rest would be subject to the estate tax. If the couple were to each own about 50% of the assets, the potential to waste any unused exemption amount would have been greatly reduced.

However, when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 passed, it allowed for portability. This term refers to the ability to transfer that unused portion to the surviving spouse, referred to as the deceased spouse’s unused exemption (DSUE). This transfer is accomplished by completing the election on the Form 706 Estate Tax Return and can be completed without regard to the legal ownership of assets by each spouse.

Calculating the DSUE is relatively simple. The DSUE will be equal to the unused amount from the year the spouse passed away, based on the inflation-adjusted exemption from that year. When the surviving spouse passes, their exemption will be the DSUE from the predeceased spouse plus the exemption for the surviving spouse in the year of their death.

Caveats to the DSUE

Form 706

To use the DSUE, the estate must timely file an Estate Tax Return when the first spouse passes away, and the “portability” election must also be completed appropriately. These steps could be easily overlooked since an Estate Tax Return does not necessarily have to be filed if the estate is below the exemption amount. The original due date of an Estate Tax Return is 9 months from the date of death; an extension can be filed for an additional 6 months. As of July 8, 2022, the IRS and Treasury Department granted relief for late filing up to 5 years if the return is being filed exclusively for portability.

Second Marriages

The IRS has imposed a “last deceased spouse rule”, meaning that if a taxpayer had a DSUE and then subsequently remarries, they forfeit the first DSUE in the event their second spouse passes away. There are some tax planning strategies that can be used to protect the first DSUE. One potential tactic is to use up the DSUE through gift-giving, treating it as a shield for gifts given over the annual limit of $19,000. The DSUE will be reduced before it becomes unusable, and the taxpayer will not have to pay taxes on these gifts. However, the generation-skipping transfer (GST) exemption is not portable so it does need some careful planning to make sure assets are transferred appropriately.

Estate Planning Considerations for Taxpayers

Married couples should first consider what the expected value of their estate will be over their lifetime and if they expect their estate to be subject to estate taxes.  Thoughtful use of gifts during a lifetime can help avoid costly estate taxes to heirs.

It’s important to work with a trusted advisor on developing your estate plan. Anders has Family Wealth and Estate Planning advisors who can help ensure you and your family are preparing for the future. Contact an Anders advisor below to learn more.