One Common Estate Tax Error That Could Cost You

Takeaways

• Many families make the costly mistake of not filing an estate tax return when the first spouse dies, even when no taxes are due.
• If they fail to file IRS Form 706, the surviving spouse loses the valuable benefit of estate tax portability, which allows them to inherit any unused portion of the deceased spouse's federal estate tax exclusion.
• Preserving portability is crucial due to changing tax laws, potential asset growth, and the flexibility it provides for wealth transfers to heirs.

In estate planning, there is a surprisingly common misstep that can have costly consequences for some families. A recent Wall Street Journal article highlighted this error: the failure to file an estate tax return upon the death of the first spouse in a married couple, even when no federal estate tax is due. Neglecting this step can cause the surviving spouse to forfeit a valuable benefit known as estate tax portability.

What Is Estate Tax Portability?

Estate tax portability allows a surviving spouse to utilize any unused portion of the deceased spouse’s federal estate tax exclusion. The estate tax exclusion represents the amount an individual can transfer to their heirs without paying federal estate taxes.

For 2025, the federal estate tax exclusion amount is $13.99 million per person. (This threshold is set to rise to $15 million per person come 2026.) In theory, a married couple can shield up to $27.98 million in 2025. However, this higher combined exemption is only available if the unused portion of the first spouse’s exclusion is formally preserved and transferred to the surviving spouse.

Without portability, if the first spouse’s estate doesn’t use the full exclusion and no estate tax return is filed, the remaining exclusion is irrevocably lost. The surviving spouse would then be limited to their individual exemption amount, potentially subjecting their heirs to substantial estate tax liability.

The Common Mistake: Not Filing IRS Form 706

The critical misstep often arises from the assumption that no filing is necessary if the first spouse’s estate is below the federal exemption threshold. Because no tax is due, many families erroneously conclude that no action is required.

However, portability isn’t automatic. To secure the benefit, the executor of the deceased spouse’s estate must timely file IRS Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return, even if no estate taxes are owed. Filing this return effectively “locks in” the unused exclusion for the surviving spouse. Failing to file results in a permanent loss of this protection.

Why It Matters

Estate tax may feel like a distant issue for many families, especially given the current run of high federal estate tax exemption levels. But there are several reasons portability is worth preserving.

Changing Laws

Though recent legislation has made the tax exemption increase “permanent,” a future Congress and president could reduce the tax exemption. Families who think they’re far below the threshold now could suddenly find themselves in taxable territory if the exemption is reduced.

Growth in Assets

Real estate, retirement accounts, and other investments can appreciate significantly between the deaths of the first spouse and the surviving spouse. What is a nontaxable estate today may become a taxable estate in the future.

Flexibility for Heirs

Securing portability offers greater flexibility for the surviving spouse to make lifetime gifts, establish trusts, or provide for heirs without incurring federal estate tax.

How to Take Advantage of Portability

Families can ensure they don’t miss out on this benefit by taking a few key steps:

• File IRS Form 706 in a timely manner. Estates are not required to file an estate tax return if the deceased person’s estate is nontaxable (that is, the gross estate at the time of their death did not exceed the federal exclusion amount for that year). However, if the surviving spouse wishes to elect portability, the executor of the decedent’s estate must file Form 706 – and generally must do so within five years of the decedent’s death.
  
  (Note that if an estate is required to file an estate tax return because the value of the decedent’s gross estate exceeds the federal exclusion amount of that year, the estate’s executor must file within nine months of the first spouse’s death, though a six-month extension is available.)
  
  In some cases, the IRS allows late filings if a mistake occurs. The executor must apply for a private letter ruling or other relief, but this can be costly and uncertain. Filing on time is always best.
• Work with professionals in your state. Estate planning attorneys and tax professionals can guide families through filing requirements and help avoid overlooked opportunities.

Your Estate Tax Portability Checklist

Here’s a step-by-step checklist families can use to make sure they don’t miss out on estate tax portability when the first spouse dies:

Step 1: Gather Key Documents

• Death certificate of the deceased spouse
• Last will and testament or trust documents (if applicable)
• Comprehensive inventory of assets and liabilities with date-of-death values
• Relevant prior tax returns and financial statements

Step 2: Confirm Whether an Estate Tax Return Is Needed

• Even if the estate is below the federal exemption amount ($13.99 million in 2025), consider filing to preserve portability.
• Be sure to review your state laws. Some states have their own estate or inheritance taxes and may have separate filing requirements.

Step 3: File IRS Form 706

• Complete Form 706 and file it within the time prescribed by law of the first spouse’s death.
• Even if no tax is owed, filing Form 706 secures the unused federal exclusion for the surviving spouse.

Step 4: Elect Portability

• On Form 706, the executor must make the portability election to transfer any unused federal estate tax exclusion (called the Deceased Spousal Unused Exclusion, or DSUE) to the surviving spouse. This locks in the benefit for future use.

Step 5: Keep Records for the Surviving Spouse

• Save the IRS acceptance of the return and confirmation of the DSUE amount and all related documentation for future use by the surviving spouse’s estate.

Step 6: Update the Estate Plan

• Incorporate the DSUE into the surviving spouse’s documents.
• Remain attentive to changes in the federal estate tax exemption over time.

Step 7: Get Professional Guidance

• Consult an estate planning attorney or certified public accountant with experience in estate tax filings.
• Professional help can prevent missed deadlines and costly mistakes.

Remember, if the executor misses the deadline, the IRS sometimes allows late portability elections under special relief provisions, but this process can be more complex and expensive. Filing on time is always the best course of action.

Additional Reading

The death of a spouse is an emotionally overwhelming event, and administrative requirements may not be a family’s immediate priority. Nevertheless, timely filing of Form 706 to preserve estate tax portability can represent one of the most valuable financial safeguards available to surviving spouses.

By filing the right paperwork when the first spouse passes away, families can preserve an estate tax cushion that could save them millions. In estate planning, sometimes the most valuable asset isn’t just money — it’s the foresight to file the right form at the right time.

For additional reading about estate taxes, check out the following articles:

• Estate Planning: Estate Tax Basics
• Your Joint Accounts and Estate Tax Planning
• Pay Attention to Your State Estate Tax Exemption
• Congress Considering Full Repeal of Estate Tax