Portability election: the Form 706 a small estate still files

Most business-owning couples in Oklahoma will never owe a dollar of federal estate tax. For a death in 2026, Form 706 is required only when the gross estate plus adjusted taxable gifts and specific exemption exceeds $15,000,000, and many closely held companies, with the house and the retirement accounts added in, come in under that line. So when the first spouse dies, the family hears "you're under the threshold" and files nothing. That is usually the moment the portability election gets lost.

Portability is the right of a surviving spouse to inherit whatever part of the first spouse's federal estate and gift tax exclusion went unused. The unused part has a name, the deceased spousal unused exclusion, or DSUE. The catch is that the DSUE does not travel on its own. An executor must file Form 706 to send it across, and that return has to be filed even when the estate is nowhere near the size that would otherwise require one.

We hear the same handful of beliefs about this election from owners and their CPAs. Some are right. Several are expensively wrong. Here is how we sort them.

Myth one: "We're under the threshold, so there's nothing to file"

Reality: the filing threshold and the portability election are two different questions. The Form 706 instructions (Rev. July 2026) say a return is required when the gross estate plus adjusted taxable gifts and specific exemption is more than $15,000,000 for a 2026 death. The same instructions say a return is also required where the executor elects portability, regardless of the size of the decedent's gross estate.

Read that second sentence carefully. The election is the return. A complete and properly prepared Form 706, filed on time, with a surviving spouse in the picture, is deemed to be the election. An executor who wants to opt out checks a box in Section A of Part VI. If no return is required under section 6018(a), simply not filing avoids the election, which is exactly what most families do without realizing they made a choice.

The reason this matters for a business-owning couple is arithmetic, not law. Two spouses, each holding the full exclusion the 2026 threshold reflects, have a combined shelter of twice that figure, but only if the first spouse's unused portion is actually carried over. Skip the return and the family is back to the survivor's single exclusion, which then has to cover the company, the real estate, the life insurance, and everything the company becomes over the next twenty years.

Myth two: "The company isn't worth much today, so the exclusion doesn't matter"

Reality: the DSUE is measured at the first death, but it is spent at the second.

The instructions define the DSUE as the lesser of the basic exclusion amount in effect on the date of death or the decedent's applicable exclusion amount, reduced by the exclusion the decedent actually used. For a first spouse whose estate passes to the survivor under the marital deduction, very little exclusion gets used, so nearly the whole amount is available to port.

Now think about what happens to a closely held company between the two deaths. The survivor keeps running it, or a child does, and revenue doubles. The survivor's estate at the second death can look nothing like the estate everyone shrugged at after the first.

Add the second variable: the exclusion amount itself is set by Congress and has moved repeatedly. The IRS's own table on its estate tax FAQ page shows the filing threshold climbing from $5,000,000 for 2011 deaths to $15,000,000 for 2026 deaths, with a large jump in 2018. What Congress raised it can also lower. A ported DSUE is measured by the basic exclusion amount in effect on the first spouse's date of death, which is one more reason to capture it while that figure is known.

This is why we describe the portability-only return as cheap insurance. Nobody buys fire coverage expecting a fire this year.

Myth three: "We missed the nine-month deadline, so it's over"

Reality: there is a five-year door, and it is open to exactly the estates that skipped the return because they were small.

The ordinary rule is unforgiving. Form 706 is due within nine months after the date of death. Form 4768 can get an automatic six-month extension, and the instructions state that an executor can only elect to transfer the DSUE amount if the Form 706 is filed timely. Miss both dates and, in the normal course, the election is gone.

Rev. Proc. 2022-32 changes that for one class of estate. Under its simplified method, an executor who was not required to file under section 6018(a), and who did not file by the due date, may file a complete and properly prepared Form 706 on or before the fifth anniversary of the decedent's death, with the statement "FILED PURSUANT TO REV. PROC. 2022-32 TO ELECT PORTABILITY UNDER § 2010(c)(5)(A)" written at the top. No user fee is charged. No letter ruling is needed. The decedent must have died after December 31, 2010, leaving a surviving spouse, and must have been a U.S. citizen or resident at death. The procedure took effect July 8, 2022 and superseded Rev. Proc. 2017-34, which had allowed relief only through the second anniversary.

Two limits deserve a plain statement. First, if it later turns out the estate was required to file because it was over the threshold, the relief is void from the beginning. Second, an estate past the fifth anniversary can still ask for a letter ruling under Regulations section 301.9100-3 following Rev. Proc. 2022-1, but that is a request, not a right, and it is neither cheap nor quick.

The practitioner's wrinkle: the survivor's refund clock keeps running

Here is the part of Rev. Proc. 2022-32 that gets overlooked. The procedure extends the time to make the election. It does not extend the surviving spouse's time to claim a refund. Section 5 of the procedure says that if the ported exclusion creates an overpayment of gift or estate tax, no credit or refund is allowed once the refund period under section 6511(a) has expired, and the extension does nothing to reopen it.

Picture the sequence. First spouse dies and nobody files. Two years later the survivor gives a large block of company stock to the children and pays gift tax on it, because only the survivor's own exclusion is available. In year four, someone finally files the late portability return. The DSUE now exists, but whether that gift tax comes back depends entirely on whether the refund period on the survivor's gift tax return is still open. The procedure offers one tool: a claim filed within the section 6511(a) period, in anticipation of the late Form 706, is treated as a protective claim for refund. Someone has to know to file it.

Myth four: "A portability-only return is a formality"

Reality: it is a simpler return than a taxable one, but for a business-owning estate it is not a simple return.

The IRS does offer a shortcut. Under Regulations section 20.2010-2(a)(7)(ii), the executor of an estate not otherwise required to file may estimate, in good faith and with due diligence, the value of property that qualifies for the marital or charitable deduction. The asset still has to be reported on the appropriate schedule, but the executor is not required to enter a value for it; the estimate is included in the gross estate total.

Look at the words "marital or charitable deduction." The estimate rule covers property passing to the surviving spouse or to charity. It does not cover a block of company stock passing to the children under the will, or shares bought out by the surviving partners at the first death. Those assets need real values, and for a closely held company a real value usually means a formal appraisal. The shortcut is also unavailable when the valuation is needed for certain other elections, including deferral under section 6166.

That is the honest cost side. Preparing a complete Form 706 for an estate that owns an operating business takes professional time and often an appraisal fee, paid to protect against a tax the family may never owe. We think the trade is usually worth it, but it is a trade.

Something else belongs on the government-favorable side of the ledger. The instructions state that when the survivor later applies the DSUE, the IRS may examine the first spouse's return to verify the amount, and may adjust or eliminate the DSUE based on what it finds. Additional tax against the first estate can only be assessed within the section 6501 limitations period, but the exclusion itself stays open to review for as long as it is being used. Filing a portability return is, in effect, agreeing to keep that valuation on the table.

Myth five: "The survivor can always use it later"

Reality: the DSUE is tied to the "last deceased spouse," and that identity can change.

The instructions define the last deceased spouse as the most recently deceased person who was married to the survivor at the time of that person's death. The identity is fixed as of the date of a taxable gift or, for transfers at death, as of the survivor's own death. Remarriage alone does not change it. A widow who remarries keeps her first husband's DSUE and can keep using it for gifts while the second husband is living.

Trouble arrives when the second spouse also dies. At that point the second spouse becomes the last deceased spouse, and the instructions are explicit that a predeceased spouse's DSUE cannot be applied after the death of a subsequent spouse. A survivor may use each predeceased spouse's DSUE in succession but may not use the sum of several at once.

For a business owner this creates a planning sequence that most people never see coming. A survivor holding a large DSUE from a first marriage, and planning a second, has a reason to consider spending that exclusion through lifetime gifts of business interests, because the instructions provide that the DSUE from the last deceased spouse is applied before the survivor's own basic exclusion. Left on the shelf, it can vanish at an event nobody planned around. Our separate discussion of gifting business interests during your lifetime covers the mechanics.

Myth six: "Portability replaced the credit-shelter trust"

Reality: it replaced some of them, and it coexists uneasily with others.

Before portability, the standard tool for using both spouses' exclusions was a credit-shelter or bypass trust: at the first death, assets up to the exclusion amount went into a trust for the survivor's benefit rather than to the survivor outright, so the trust's later growth stayed out of the survivor's estate. Portability made that structure optional for many couples, not obsolete.

A ported DSUE is a fixed dollar figure. A credit-shelter trust holding company stock grows with the company, and all of that growth sits outside the survivor's estate. For a couple whose main asset is a business they expect to appreciate, a trust can shelter far more than the DSUE ever could. On the other hand, a trust needs a trustee and governance that fits the company's operating agreement, and the income-tax treatment of trust-held assets at the survivor's death differs from assets the survivor owns outright. Many plans we see use a trust for the business interest and a portability election for the rest.

In practice the couple's buy-sell agreement often decides the question for them. If the agreement forces a sale of the deceased owner's shares to the surviving partners at the first death, the business interest is converted into cash or a note, and the price the agreement produces is the starting point for the Form 706.

How we think about the portability election decision

When a client's spouse has died and the estate is under the threshold, our starting assumption is that the portability return should be filed unless there is a specific reason not to. The arguments against it are real but narrow: the cost of preparation, an appraisal that would not otherwise be needed, and a later IRS look at the first spouse's valuation. The argument for it is the size of the family's future exposure, which nobody can measure at the first death.

Timing changes the analysis. Inside nine months, or fifteen with Form 4768 on file, the filing is routine. Between fifteen months and the fifth anniversary, the return is possible under Rev. Proc. 2022-32, but the refund period on any gift made in the gap has to be checked and possibly protected. Past five years, the only path is a letter ruling request, with no assurance it will be granted.

One procedural point catches Oklahoma families in particular. Many couples we see here hold the company through a revocable trust and never open a probate at the first death. The instructions say that if an executor is appointed, qualified, and acting in the United States, only that executor may make or opt out of the election; where no executor is appointed, the regulations supply rules for who may act. Settling who has authority to sign the return is a month-one question, not a month-eight question.

If a spouse has died and the family is weighing whether a return nobody is forcing them to file is worth the trouble, that is a good moment to talk it through with us, before the nine-month mark and well before the fifth anniversary. Reach our Oklahoma City office or use the contact page on this site. A conversation while the options are all still open tends to cost far less than the one that starts after a window has closed.

This article is general information about Oklahoma, Texas, and federal law, not legal advice, and it does not create an attorney-client relationship. Facts matter; talk to a lawyer about yours.