Portability of the Estate Tax Exemption

“Portability” has been touted as one of the most significant estate planning developments in the 2010 Tax Act. It is considered to be a way to “simplify” estate planning by allowing the estate tax exemption (which is now $5 million) to be used, even if estate planning was not done before death. Typically, a couple will create a trust in their will (often known as a credit shelter or bypass trust) to “capture” the exemption of the first spouse to die. Any future appreciation in that trust is not taxed on the death of the second spouse. If this is not done, all of the assets may end up in the estate of the second to die, creating a larger total estate that might be subject to an estate tax.

While conceptually, this simplification can be a nice idea, there are some complications that people should be aware of:

1. Portability does not apply for State Estate Tax (many states impose their own version of the estate tax,) Generation Skipping Tax (GST) and it also does not address post death appreciation.
2. One of the advantages of using a trust for assets in an estate plan is that it provides for asset protection from creditors. Relying on portability alone does not offer than same protection.
3. In order to use the portability provisions, a complete and timely estate tax return must be filed for the first spouse to die and you must elect to use the decedent’s unused exemption. If there are multiple, hard to value assets, the costs of doing a full estate tax return may be significant.
4. Today’s “modern family” often has conflicting goals between the surviving spouse, children from prior marriages, etc. This creates a situation that needs to be thought through carefully, with an understanding of the current and future family dynamics.
5. Taking this approach keeps the statute of limitations open indefinitely and the IRS could challenge valuations or other aspects of the returns.

Estate planning is a complex area that needs to be developed from the goals for the individual and the family. Tax considerations play an important, but not solitary role. While portability can help where the proper planning has not been done before death, it should not be a substitute for doing good estate planning during your lifetime. Let us know if we can help you look at your overall estate plan to make sure that it reflects your current desires. 

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