Skip to main content
A Better Partnership

Publications

Oct 2013
21
October 21, 2013

Portability: A New Paradigm for Married Couples’ Estate Planning


When married couples develop an estate plan, they generally seek to take full advantage of the federal estate tax exclusion to which they are entitled.  Recent legislation is giving them a new way to do that: portability.

The traditional approach has been to develop an estate plan that creates a credit shelter trust upon the death of the first spouse.  This is funded with assets that equal the deceased spouse’s available exclusion amount.  These assets remain sheltered from estate taxes for the benefit of the surviving spouse while the balance is usually distributed to the surviving spouse, either outright or in trust.

Enter portability, which introduces a useful and convenient alternative to the established credit shelter model.  Introduced by federal legislation in 2010, and more recently made permanent with the passage of the American Taxpayer Relief Act of 2012, portability permits a surviving spouse to utilize the unused estate tax exclusion of the deceased spouse.

By way of example, let’s look at a couple where one spouse dies in 2013 having utilized $2.25 million of the $5.25 million exclusion amount.  The unused exclusion amount for the deceased spouse is $3 million. Under portability, the surviving spouse can claim up to $3 million in estate tax exclusion on top of his or her own available exclusion. 

Portability is a convenient tool that enables a married couple to take full advantage of the estate tax exclusion without the complexity and restrictions inherent in the credit shelter model.  In an estate plan built around portability, the assets of the spouse who dies first can simply pass directly to the surviving spouse, free of trust, without jeopardizing the exclusion of the deceased spouse.

Titling concerns are also alleviated by portability.  In order to fully realize the benefits of the credit shelter model, couples need to give strong consideration to how assets are titled between them.  To the extent that the spouse who dies first has assets below the exclusion amount, the unused portion is wasted.  With portability, though, titling of assets between spouses is of less importance since the unused exclusion of the spouse who dies first is not lost, but simply rolled over to the surviving spouse.

Though convenient, portability does not trump the credit shelter model in all circumstances.  Income taxes, asset investment returns and distribution objectives must also be considered when evaluating which model to choose.  For example, the credit shelter model may be advisable in cases where the gap between the deaths of spouses may be significant and/or where the assets funded to the credit shelter trust are likely to appreciate substantially in value.  The credit shelter model also presents advantages in terms of asset protection and generation-skipping transfer tax planning although, in some cases, similar results can be achieved through the use of additional estate planning techniques coupled with portability.

Portability is not without its requirements and restrictions.  First and foremost, portability is not automatic and must be elected by the executor of the deceased spouse’s estate through the timely filing of a federal estate tax return.  It’s important to note that this can, in many cases, turn into a fairly expensive proposition.

Moreover, individuals married more than once should be mindful that portability only applies to the unused exclusion of the surviving spouse’s “last deceased spouse,” although portability regulations may provide some additional flexibility.  Lastly, portability does not apply to generation-skipping transfer taxes, which apply to transfers to grandchildren and others typically more than one generation removed from the deceased.  In the absence of additional estate planning measures, unused generation-skipping transfer tax exclusion is lost forever upon death.

In a nutshell, portability has certainly changed the way estate planning should be approached.  However, every estate plan is unique and there remains no “one-size-fits-all” approach to estate planning for married couples.  For more details on whether an estate plan built around portability is right for you and your spouse, please contact your WNJ estate planning attorney.

NOTICE. Although we would like to hear from you, we cannot represent you until we know that doing so will not create a conflict of interest. Also, we cannot treat unsolicited information as confidential. Accordingly, please do not send us any information about any matter that may involve you until you receive a written statement from us that we represent you.

By clicking the ‘ACCEPT’ button, you agree that we may review any information you transmit to us. You recognize that our review of your information, even if you submitted it in a good faith effort to retain us, and even if you consider it confidential, does not preclude us from representing another client directly adverse to you, even in a matter where that information could and will be used against you.

Please click the ‘ACCEPT’ button if you understand and accept the foregoing statement and wish to proceed.

ACCEPTCANCEL

Text

+ -

Reset