What is the effect of portability on estate tax exclusion?

Portability pertains to the ability of a surviving spouse to utilize the unused estate tax exclusion of their deceased spouse. Specifically, when one spouse dies, they may leave behind a gift exclusion that was not fully used during their lifetime. Portability allows the surviving spouse to add this unused exclusion amount to their own estate tax exclusion limit.

Therefore, the correct understanding is that portability effectively reduces the taxable estate of the surviving spouse by allowing them to use the combined exclusion amounts from both spouses. This means that the surviving spouse's estate can potentially benefit from a greater exclusion from the estate tax, leading to a lower taxable estate and possibly reducing the amount of tax owed upon their death.

The other choices do not accurately depict the function of portability. For instance, transferring unused exclusion to a beneficiary isn't how portability operates; it's about the surviving spouse's tax situation. Similarly, portability does not influence future gift exclusions nor does it have no effect on estate tax exclusion, as it directly enhances the financial benefits available to the surviving spouse in terms of their estate tax responsibilities.