Federal Portability and New York Estate Tax: What Westchester Families Must Know

For married couples with significant assets, the federal portability election offers what appears to be a simple solution to estate tax planning: when the first spouse dies, the surviving spouse can use any unused portion of the deceased spouse’s federal exemption. This can effectively give a couple a combined federal exemption of $30,000,000 (in 2026) without any trust planning at all.

For New York estate tax purposes, however, portability does not exist. New York recognizes only the estate tax exclusion belonging to the individual whose estate is being taxed. This fundamental difference creates a planning trap that many Westchester families encounter: they plan for federal portability and inadvertently lose their first spouse’s entire $7,350,000 New York estate tax exclusion.

This guide explains how federal portability works, why New York does not recognize it, and why married couples in Westchester County need to plan for both systems simultaneously.

What Is Federal Portability?

Federal portability is an election available to married couples under Internal Revenue Code Section 2010(c)(4). It allows a surviving spouse to use the deceased spouse’s unused federal estate tax exemption, known as the Deceased Spouse’s Unused Exclusion (DSUE).

Here is how it works:

In 2026, the federal estate tax exemption is $15,000,000 per person. If a married couple has combined assets of $25,000,000, and the first spouse dies, the federal estate tax would normally apply to any assets above the $15,000,000 exemption. Under portability, however, the surviving spouse can elect to preserve the deceased spouse’s unused exemption. If the deceased spouse’s estate used only $5,000,000 of the $15,000,000 exemption, the surviving spouse can add that $10,000,000 DSUE to his or her own exemption, for a combined total of $25,000,000.

The result: The couple’s entire $25,000,000 estate avoids federal estate tax without any trust planning.

Portability is particularly attractive because it appears to eliminate the need for credit shelter trusts, bypass trusts, and other trust-based planning strategies that were once considered essential for married couples. Many families and their advisors have concluded that portability makes traditional trust-based planning unnecessary.

This conclusion is dangerously incomplete for families living in New York. Unlike the federal system, New York’s unique estate tax cliff and lack of portability require coordinated planning.

The Portability Election Requirements

Portability is not automatic. The surviving spouse must affirmatively elect portability by filing a federal estate tax return (Form 706) within a specified deadline.

The deadline: Originally, Form 706 had to be filed within nine months of the decedent’s death (or fourteen months with a late filing election). In 2022, however, the IRS issued Revised Procedure 2022-32, which extended the deadline for making the portability election to two years after the date of death, provided the decedent’s estate is otherwise too small to require a return.

This extension is significant. A family has substantially more time to gather information, value assets, and decide whether to file. However, the deadline is still absolute: if the estate misses this deadline, the portability election is lost forever, and the deceased spouse’s unused exemption cannot be transferred.

For families in Westchester County (where estates often include real property, closely held businesses, and other difficult-to-value assets), the two-year window provides useful breathing room, but it does not eliminate the need for careful administration.

New York’s Position: No Portability

New York does not recognize portability for state estate tax purposes. The New York Estate Tax is governed by Tax Law Section 954, which imposes tax on the taxable estate of a decedent resident of New York. The statute provides for a basic exclusion amount ($7,350,000 in 2026) but does not authorize the transfer of an unused exclusion from one spouse to another.

The plain language of the statute is this: Each individual is entitled to a single $7,350,000 exclusion. When that individual dies, the exclusion is applied to his or her own estate. No surviving spouse can inherit or use the deceased spouse’s exclusion.

This creates a stark asymmetry. At the federal level, a surviving spouse can use the deceased spouse’s unused federal exemption. At the state level in New York, the surviving spouse can use only his or her own state exclusion.

The Consequence: Loss of the First Spouse’s Exclusion

For couples relying solely on federal portability, the consequence is clear and substantial:

If the first spouse dies with a taxable New York estate below $7,350,000, the unused portion of the exclusion is lost.

Consider a concrete example:

• A married couple in Scarsdale has a combined estate of $14,000,000.
• The first spouse dies with an estate of $6,000,000.
• That $6,000,000 estate owes no New York estate tax because it is below the $7,350,000 exclusion.
• However, the first spouse “used” $0 of the $7,350,000 exclusion. The full $7,350,000 could have been sheltered.
• Under New York law, that unused $7,350,000 disappears when the first spouse dies.
• The surviving spouse is left with a $7,350,000 exclusion for his or her own estate.
• When the surviving spouse dies with the remaining $8,000,000 estate, the $8,000,000 exceeds the $7,350,000 exclusion, and New York estate tax applies to the $650,000 excess.

Federal level: Portability allows the surviving spouse to use the deceased spouse’s unused $9,000,000 federal exemption. No federal estate tax is owed.

New York level: Portability does not exist. The first spouse’s unused $7,350,000 New York exclusion is permanently lost. The surviving spouse owes New York estate tax on the excess.

The New York tax bill on $650,000 of taxable estate would be approximately $63,000. This tax could have been avoided entirely with proper planning.

Why Federal Portability Alone Is Insufficient

The interaction between federal and New York estate tax creates a dangerous gap in planning if a couple relies on federal portability alone.

Portability solves the federal problem but not the New York problem. A surviving spouse can use the deceased spouse’s federal unused exemption without any trust planning. However, at the state level, there is no corresponding mechanism. The surviving spouse cannot access the deceased spouse’s New York exclusion.

For couples with combined estates between $7,350,000 and $15,000,000, this gap is particularly acute. Federal portability may eliminate the federal estate tax entirely, but the first spouse’s unused New York exclusion will be lost unless the couple used a credit shelter trust.

The mathematical reality: A married couple can shelter $30,000,000 from federal estate tax through portability alone. The same couple can shelter only $7,350,000 from New York estate tax if they rely on portability and do not use trust planning.

The Solution: Combining Portability with Trust Planning

The answer is not to abandon portability. Federal portability is valuable and should be elected whenever applicable. The answer is to recognize that portability and trust planning are not either-or choices. They work together.

The recommended approach for Westchester families is this:

File the federal estate tax return to elect portability. This preserves the deceased spouse’s unused federal exemption and allows it to be used by the surviving spouse. This election should be made because it costs nothing and forecloses no other options.

Simultaneously, use a credit shelter trust (or similar trust-based strategy) to shelter assets at the New York level. When the first spouse dies, assets equal to the New York exclusion amount (or less, depending on the estate size and tax objectives) are placed in a trust. The surviving spouse can receive income and, depending on the trust terms, principal distributions for health, education, maintenance, and support. At the surviving spouse’s death, the trust assets pass to the children or other beneficiaries without being included in the surviving spouse’s New York taxable estate.

The result: Both the deceased spouse’s federal exemption and New York exclusion are preserved and used.

Here is how this works in the Scarsdale example:

• The couple has a combined estate of $14,000,000.
• The first spouse dies with an estate of $6,000,000.
• The estate files Form 706 to elect federal portability.
• Simultaneously, the estate places $6,000,000 (or the full $7,350,000 if structured as a credit shelter trust) in a trust for the benefit of the surviving spouse and children.
• At the federal level, the surviving spouse now has the full $15,000,000 exemption (his or her own exemption) plus the deceased spouse’s unused $9,000,000 federal exemption (through portability), for a combined $24,000,000. The entire $14,000,000 estate is sheltered from federal estate tax.
• At the New York level, the credit shelter trust assets are not included in the surviving spouse’s estate when the surviving spouse dies. Both spouses’ $7,350,000 New York exclusions have been preserved and used. The entire $14,000,000 estate is sheltered from New York estate tax.

Without the credit shelter trust, the same $14,000,000 estate would owe New York estate tax on approximately $650,000 of taxable value.

The Form 706 Filing Requirement

To elect portability, the executor or representative of the deceased spouse’s estate must file Form 706, the federal estate tax return, even if the estate is not large enough to require a filing.

Key points:

• The return must be filed within two years of the date of death (under Revised Procedure 2022-32), provided the estate is otherwise exempt from the filing requirement due to size.
• If the executor misses this deadline, the portability election is lost forever. The deceased spouse’s unused exemption cannot be transferred to the surviving spouse.
• Filing Form 706 is separate from the decision to use trust planning for New York purposes. Form 706 is a federal document that accomplishes the federal portability election; it does not automatically carry over to New York state planning.
• The executor should consult with a tax professional to ensure that the Form 706 is filed correctly and that all applicable elections (including portability) are properly made.

Common Mistakes

Many families and their advisors make critical errors when addressing portability and New York estate tax:

Mistake 1: Assuming portability applies to New York. Some families understand that portability exists at the federal level and incorrectly assume it applies to New York as well. When the first spouse dies, they fail to implement trust-based planning to preserve the New York exclusion. The consequence is permanent loss of that exclusion.

Mistake 2: Assuming portability makes trust planning unnecessary. Federal portability is valuable for federal purposes, but it does not eliminate the need for New York-focused trust planning. Families should not abandon credit shelter trusts or other trust strategies based on federal portability alone.

Mistake 3: Failing to file Form 706. Some families, particularly those with estates that do not exceed the federal exemption, believe Form 706 does not need to be filed. However, the filing of Form 706 is the mechanism for electing portability. Failure to file means the portability election is not made, and the deceased spouse’s unused exemption is lost.

Mistake 4: Delaying the decision to file. The two-year deadline for filing Form 706 may seem generous, but time passes quickly. Executors and families should initiate the decision-making process well in advance of the deadline. Missing the deadline by even one day results in permanent loss of portability.

Mistake 5: Not accounting for New York’s cliff. Families may use federal portability to avoid federal estate tax but then discover that their New York estate exceeds the $7,717,500 cliff threshold (105% of the $7,350,000 exclusion). At the cliff, the entire New York exclusion disappears, and the full estate is taxed from the first dollar. Trust planning can be structured to avoid crossing the cliff, but portability alone cannot.

Westchester Planning Implications

For Westchester families, the combination of federal portability and New York non-portability creates specific planning opportunities and challenges.

The opportunity: Families with estates between $7,350,000 and $15,000,000 can now use federal portability to avoid federal estate tax while simultaneously using trust planning to avoid New York state tax. This hybrid approach is more flexible than the pure trust-based planning that was necessary when federal exemptions were lower.

The challenge: Families must coordinate federal and state planning. A plan that optimizes federal tax treatment might not optimize New York tax treatment, and vice versa. The estate plan and the administration of the estate must account for both systems.

The Westchester context: Many Westchester families have combined estates between $7,350,000 and $15,000,000. These are the families for whom this coordination matters most. A family whose combined estate is $10,000,000 might be comfortable relying on federal portability (which would shelter the entire amount from federal tax), but if they do not have a credit shelter trust in place, they are guaranteed to owe New York estate tax on approximately $2,650,000 of the estate when the second spouse dies.

Planning Checklist

Married couples in Westchester County should address the following in their estate planning:

Review the will or revocable trust. Confirm that the estate plan either includes credit shelter trust provisions or explicitly contemplates portability as the sole planning strategy. If the plan is silent, or if it was drafted before 2024, it may need updating.

Confirm that both the federal and New York dimensions of the plan are understood. Many families have experienced advisors for federal tax planning but have not addressed New York tax planning specifically. Both dimensions matter.

Ensure that the first spouse’s estate will be administered in a way that supports both federal and New York planning. If federal portability is intended, Form 706 must be filed. If trust planning is intended, the estate must be settled in a way that funds the trust appropriately.

Consider the couple’s actual asset size relative to the exclusions. A couple with a $9,000,000 estate needs both federal and New York planning. A couple with a $4,000,000 estate may not need either, provided the assets remain below the exclusions and no other planning concerns exist (such as minor children or creditor exposure).

Plan for the second spouse’s death. Even with portability and trust planning in place, the second spouse’s death must be addressed. A surviving spouse should have a plan in place that accounts for his or her own exclusions and the mechanics of passing wealth to the next generation.

Conclusion

Federal portability is a valuable and underutilized election that allows married couples to use the deceased spouse’s unused federal exemption. However, portability is exclusively a federal provision. New York state does not recognize it, and married couples who rely on portability alone while living in New York expose themselves to substantial and unnecessary state estate tax liability.

For Westchester families, the optimal approach is to elect federal portability (which costs nothing and forecloses no other planning options) while simultaneously implementing trust-based planning to preserve and use the New York exclusion. Credit shelter trusts, life insurance trusts, and similar strategies remain essential tools in New York estate planning, not obsolete mechanisms made unnecessary by federal portability.

The interaction between federal portability and New York non-portability is complex, and the stakes are significant. Every married couple with substantial assets in Westchester County should review their estate plan with an attorney experienced in both federal and New York estate tax law.

If you are a Westchester County resident with questions about federal portability, New York estate tax, or how to coordinate planning for both systems, we encourage you to schedule a consultation with our office. Proper planning now can preserve hundreds of thousands of dollars for your family.