The One Big Beautiful Bill Act (OBBBA) increased the federal estate and gift tax exemption to $15 million in 2026 (indexed for inflation) and removed previous sunset concerns. For many married clients, that feels like certainty—but the need for planning remains.
Portability allows a surviving spouse to use the deceased spouse’s unused federal estate tax exemption (deceased spousal unused exclusion, or DSUE), effectively combining both exemptions. When properly elected, portability can significantly reduce federal estate tax liability and create flexibility for the surviving spouse. But portability only solves one piece of the estate planning puzzle. Life insurance can help fill the gaps.
How Portability Works
Consider a couple where the first spouse, Bob, dies in 2026 after using $5 million of his lifetime exemption. His surviving spouse, Jan, elects portability and adds Bob’s $10 million exemption to her own. Now, her $25 million federal exemption can potentially eliminate federal estate tax liability and preserve more wealth for her heirs.
However, portability is not automatic. Even if no estate tax is owed, the deceased spouse’s estate must file a federal estate tax return (Form 706) within nine months (or up to 15 months with an extension) to preserve the DSUE. (Executors of estates not required to file Form 706 may have up to five years to elect portability.)
Filing Form 706 is almost always a smart move. If the surviving spouse ends up needing the extra exclusion but doesn’t have it, the result could be millions in unanticipated estate taxes.
Limitations of Portability
Portability can be a valuable tool, but clients should be aware of its limitations.
• No impact on state estate taxes. States with their own estate taxes may have exemption limits lower than the federal limit.
• No generation-skipping transfer (GST) tax portability. Portability does not apply to the GST tax. Families looking to provide for grandchildren or establish multigenerational trusts will need to explore additional strategies beyond portability.
• No liquidity. Exemptions don’t provide cash to pay taxes, settle debts, or equalize inheritances. Life insurance can address these needs.
• No control over asset management. While portability preserves the exemption, it does not dictate how assets are managed, distributed, or protected for heirs. Assets remain vulnerable to creditor claims unless additional tools, such as trusts, are used to provide control and protection.
• No automatic usage upon remarriage. Portability only applies to the last deceased spouse. If the surviving spouse remarries and the second spouse dies, any unused exemption from the first deceased spouse is forfeited.
How Life Insurance Complements Portability
Portability alone doesn’t address liquidity or asset protection, but life insurance can fill these gaps—especially when held in an ILIT. Life insurance:
• Provides immediate liquidity. It ensures that heirs have cash when needed—without a forced sale.
• Keeps proceeds outside the taxable estate. ILIT-held policies reduce estate tax exposure.
• Supports multigenerational goals. Life insurance can fund GST-exempt trusts that enable families to achieve long-term, multigenerational wealth transfer objectives.
• Adds control and protection. Trust ownership ensures assets are distributed according to the family’s intentions while also offering protection from creditors, lawsuits, or potential mismanagement by heirs.
Example: Portability Plus an ILIT Equals the Better Solution
George and Sally have a combined wealth of $24 million in 2026, primarily tied to a family business and real estate. When Sally passes, the executor timely files Form 706 and elects portability, transferring her unused $12 million exemption to George.
By the time George dies, the estate has grown to $36 million. Even with inflation-adjusted exemptions and portability, the family faces a significant federal estate tax bill. Adding to the challenge, their state imposes its own estate tax with a lower exemption. The heirs are scrambling to find liquidity, considering options such as selling business shares, borrowing against real estate, or liquidating assets.
If George and Sally had used an ILIT with a $10 million life insurance policy, the trust could have:
• Provided tax-free liquidity to pay estate taxes
• Preserved the family business and real estate
• Avoided a forced sale or financial strain on heirs
Implementation Cautions
Even well-designed portability and ILIT strategies can fail if they don’t meet technical requirements. There are two areas that demand particular attention:
1. The IRS three-year rule. If a client gifts an existing life insurance policy to an ILIT and dies within three years, the death benefit is pulled back into the taxable estate. To avoid this, have the ILIT purchase the policy directly.
2. The critical need for accuracy and compliance. The importance of filing Form 706 correctly cannot be overstated. In a 2025 case, Estate of Rowland v. Commissioner, the Tax Court held in favor of the IRS, denying the portability election due to improper filing, resulting in the loss of the DSUE. In client conversations, reiterate the need to file Form 706 on time to secure portability and explain how life insurance can provide the flexibility and liquidity that exemptions alone cannot deliver.
Beyond Portability: Strategic Life Insurance Solutions
Despite the higher federal estate tax exemptions under OBBBA, portability is not the final solution—it’s the starting point. For married clients, a portability discussion often opens the door to a more important conversation about liquidity, control, multigenerational planning, and the strategic role life insurance can play in a stable estate tax environment.
