I sat down with a couple recently who had done their homework. They'd read that federal estate tax portability meant a surviving spouse could inherit whatever exemption the first spouse didn't use, and they'd concluded — reasonably, based on what they'd read — that this made a lot of the traditional trust planning I do for married couples unnecessary. They were shocked to learn that New York does not recognize portability at all, and that without additional planning, a substantial piece of the first spouse's New York exemption could simply vanish the moment the first spouse died. If you're a married New York resident with an estate above a few million dollars, this is a conversation you need to have before, not after, the first death in your family.
Portability is a genuinely useful federal tool, and I want to explain how it works. But I also want to be direct about where it stops working: at the New York border. Couples who plan only around federal rules, without factoring in New York's separate and much smaller exemption, often end up paying New York estate tax that a properly drafted will or trust could have avoided entirely.
What Is Federal Portability?
Federal estate tax portability, created under IRC §2010(c), lets a surviving spouse use the deceased spouse's unused federal estate tax exemption in addition to their own. The unused amount is called the Deceased Spousal Unused Exclusion, or DSUE. In practice, this means that if the first spouse to die used none, or only part, of their federal exemption, the survivor can add that leftover amount to their own exemption and shelter a much larger combined estate from federal estate tax when they eventually pass.
To put the scale of this in perspective, the federal estate tax exemption is currently over $13 million per person, and it is adjusted for inflation each year. For a married couple, portability means that in theory nearly the entire combined estate — potentially well over $26 million — can pass free of federal estate tax, as long as the DSUE from the first spouse's estate is properly preserved and used before the survivor's death or before it is otherwise reduced.
I emphasize "in theory" and "properly preserved" because portability is not automatic. It is an election, and if the necessary paperwork isn't filed, the DSUE is lost regardless of how the couple's assets were actually structured. I explain how this fits into the bigger federal and state picture in more detail on our estate tax planning page, but the short version is this: portability is a valuable federal backstop, not a substitute for planning.
How and When to Elect Portability
Here is the detail that catches people off guard: to preserve portability, the deceased spouse's estate must file a federal estate tax return, Form 706, and must affirmatively elect portability on that return. Nothing happens automatically. If no return is filed, or if a return is filed but the box isn't checked, the DSUE is gone.
This creates an odd situation for a lot of families. Because the federal exemption is so high, the overwhelming majority of estates don't owe any federal estate tax and, historically, wouldn't have had any legal obligation to file a federal estate tax return at all. But if that estate wants to preserve portability for the surviving spouse, the executor has to file Form 706 anyway — even though the return will show zero tax due. Skipping the filing because "we don't owe anything" is exactly how families accidentally forfeit a benefit that could be worth hundreds of thousands of dollars in future tax savings.
Timing matters too. For an estate that was already required to file Form 706 because it exceeded the federal exemption, the portability election generally must be made on a timely filed return, due nine months after the date of death, with an available six-month extension. For estates that were not required to file at all, the IRS has extended a helpful accommodation: under Rev. Proc. 2022-32, those estates can make a simplified late portability election for up to five years after the date of death. That five-year window has saved a lot of surviving spouses who didn't get the right advice the first time around, but it is not a substitute for handling the election correctly and promptly when the first spouse dies. I'd rather see clients get it right the first time than rely on a rescue provision. The IRS publishes detailed guidance on this if you want to read the source material directly: IRS guidance on the Deceased Spousal Unused Exclusion.
The Catch: New York Does Not Allow Portability
This is the part of the conversation that surprises almost every couple I meet with, including sophisticated ones. New York has its own, entirely separate estate tax system, with its own exemption amount — currently in the range of roughly $7 million per person, also adjusted annually. And unlike the federal system, New York offers no portability whatsoever between spouses.
Each spouse's New York exemption is strictly "use it or lose it." If the first spouse to die leaves everything outright to the surviving spouse — which is extremely common, and which qualifies for the unlimited marital deduction so no New York tax is due at that first death — the first spouse's New York exemption isn't carried forward, isn't shared, and isn't available to the survivor in any form. It simply expires unused.
Key point: Federal portability and New York estate tax planning are not the same conversation. A couple can do everything right on their federal Form 706, preserve the DSUE perfectly, and still lose an entire New York exemption — worth roughly $7 million of shelter — simply because no one structured the first spouse's estate to actually use it. Portability federally does not mean portability in New York.
For a couple with a combined estate well above the New York exemption, this gap can translate into a real New York estate tax bill at the second spouse's death that better planning could have avoided or substantially reduced. I go into the mechanics of how the New York tax is calculated, including how the exemption interacts with lifetime gifts, in our companion piece on how the New York estate tax works.
Why Credit Shelter Trusts Still Matter for New Yorkers
This is exactly why I still draft credit shelter trusts, sometimes called bypass trusts, for married clients whose combined estate is likely to exceed the New York exemption. The mechanism is straightforward: instead of leaving everything outright to the surviving spouse, the first spouse's estate plan funds a trust, up to the New York exemption amount, for the benefit of the surviving spouse and often the couple's descendants as well. The surviving spouse can typically still receive income from the trust, and often principal for health, education, maintenance, and support, so in practical day-to-day terms they are not giving anything up.
What that structure accomplishes is that it actually uses the first spouse's New York exemption at the first death, rather than letting it evaporate. The assets in the credit shelter trust, along with any future appreciation on them, are then generally excluded from the surviving spouse's estate when they later pass, because the surviving spouse never owned those assets outright. That is New York exemption that would otherwise have been permanently lost, now working for the family instead.
I want to be clear about something, because I hear this misconception often: federal portability did not make this kind of trust planning obsolete. It made it optional in cases where a couple's estate is comfortably under the federal exemption and unlikely to ever approach it — but for New York couples with estates that could exceed the much smaller state exemption, credit shelter trust planning remains one of the most effective tools available. You can read more about how these trusts fit into a broader plan on our wills and trusts practice page, and there are complementary lifetime strategies worth considering as well, which I cover in our post on gifting to reduce New York estate tax.
The New York "Cliff" and Why It Compounds the Problem
New York adds another wrinkle that has nothing to do with portability directly, but that makes the stakes of getting this planning right even higher: the New York estate tax "cliff." Under New York's rules, if a taxable estate exceeds the New York exemption amount by more than 5%, the exemption isn't just reduced — it disappears entirely, and the tax is calculated on the full value of the estate, not merely on the amount above the exemption.
To see how punishing this can be, imagine an estate that comes in just over that 5% cushion above the exemption. Instead of paying New York estate tax only on the modest excess, as you would expect under a typical marginal-rate system, the estate loses its exemption altogether and owes tax calculated from the very first dollar. A relatively small difference in estate value, sometimes just tens of thousands of dollars, can trigger a dramatically larger tax bill once the cliff is triggered.
This cliff compounds the portability problem in a very specific way for married couples. If the first spouse's exemption was wasted because everything passed outright to the survivor, the surviving spouse's estate is left relying on a single exemption to cover what might be a combined lifetime of assets. That makes it far more likely the survivor's estate will land at or above the New York threshold, and given how the cliff works, even a modest overage can be financially significant. Proper use of the first spouse's exemption through trust planning doesn't just preserve that exemption; it also reduces the odds that the surviving spouse's estate falls anywhere near the cliff at all.
Coordinating Federal and New York Planning
The right approach for most New York couples with meaningful assets is to plan for both systems at once, rather than assuming one set of rules and being surprised by the other. In practice, that usually means a few coordinated steps.
First, we design the estate plan so that, if appropriate given the size of the estate, a credit shelter trust is funded at the first spouse's death up to the New York exemption amount, preserving that exemption rather than letting it pass outright and go unused. Second, we make sure the executor understands that filing Form 706 to elect federal portability may still be worthwhile even when no federal tax is owed, so the DSUE is preserved as an additional layer of protection for whatever assets do pass outright to the surviving spouse. Third, we monitor how close a projected estate is to the New York exemption and the 5% cliff threshold, because that proximity should influence lifetime gifting decisions, insurance planning, and how assets are titled between spouses.
None of this is a one-size-fits-all formula. A couple with a combined estate comfortably under the New York exemption may need very little of this complexity. A couple with a combined estate well into eight figures may need both aggressive use of federal portability and carefully funded New York credit shelter trusts, plus lifetime gifting strategies, to minimize exposure on both fronts. The right mix depends on the value and character of your assets, whether they're likely to appreciate, and your goals for descendants versus your spouse. I generally recommend starting with a clear-eyed projection of where your estate is likely to stand relative to both the federal and New York exemptions, and building the plan from there. You can find an overview of how we approach this kind of planning on our estate planning practice page.
If you and your spouse have significant assets and haven't reviewed your plan with New York's separate exemption and cliff rule specifically in mind, I'd encourage you to do so soon, particularly if your current documents leave everything outright to each other. A Free consultation is a good place to start that review and to see whether credit shelter trust planning, updated beneficiary designations, or a lifetime gifting strategy makes sense for your family. You can reach our office at (212) 561-4299.
Frequently Asked Questions
What is federal estate tax portability?
Federal portability, under IRC §2010(c), allows a surviving spouse to add their deceased spouse's unused federal estate tax exemption (the DSUE) to their own exemption. It is not automatic — it must be elected by filing a federal estate tax return (Form 706) for the deceased spouse's estate.
Do we need to file a federal estate tax return if no tax is owed, just to preserve portability?
Yes. Because the federal exemption is over $13 million and adjusted for inflation, most estates owe no federal estate tax and historically weren't required to file Form 706. But to preserve portability for the surviving spouse, the estate must file Form 706 anyway, even showing zero tax due. Estates that missed this can sometimes use a simplified late election under Rev. Proc. 2022-32 within five years of death.
Does New York allow portability of its own estate tax exemption between spouses?
No. New York has its own separate estate tax exemption, currently in the roughly $7 million range, and it does not permit portability at all. Each spouse's New York exemption is use-it-or-lose-it, so if the first spouse's exemption goes unused, it is permanently lost.
If federal portability exists, do New York couples still need credit shelter trust planning?
For couples whose combined estate could exceed the New York exemption, yes. Since New York doesn't allow portability, funding a credit shelter (bypass) trust at the first spouse's death, up to the New York exemption amount, is often the only way to actually use that exemption rather than lose it forever.
What is the New York estate tax "cliff"?
If a New York taxable estate exceeds the state exemption amount by more than 5%, the entire exemption is lost and New York estate tax is calculated on the full value of the estate, not just the excess. This can create a disproportionately large tax bill from a relatively small increase in estate value.
