TAX UPDATE - Portability

Over the past 30 years, marital estate planning has evolved. Probably the most significant provision in estate planning for married couples was the passage of the unlimited marital deduction as part of the Economic Recovery Tax Act of 1981. From that evolved the traditional credit shelter or by-pass trust and now with portability becoming a mainstay in the federal transfer tax system, married couples are allowed full utilization of both spouses’ applicable exclusion amounts at any time.

The IRS released final regulations (TD 9725) on the portability election on June 12, 2015. Portability is best defined as the “transferability” of a deceased spouse’s unused estate tax exclusion amount to the surviving spouse. Portability allows the executor to transfer a decedent’s unused estate tax exclusion to the decedent’s surviving spouse, who can then use it for his or her gift or estate tax purposes. To make the election, estates must file an estate tax return, Form 706, even it not otherwise required to file because they’re below the filing threshold which is $5.43 million for 2015.

Portability introduced the concept of the “DSUE amount” or the “deceased spousal unused exclusion amount”. Also, the term “Lifetime Exclusion Amount” is a technical term defined as the applicable exclusion amount. An individual’s applicable exclusion amount is the combination of the taxpayer’s “basic exclusion amount” i.e. $5.43 million for 2015, and any “DSUE Amount”, and can be used over an individual’s lifetime for gifting purposes or at death. Before portability, absent proper planning often at least some of the exclusion amount was wasted upon the first spouse’s death. It was considered a “use it or lose it” proposition.

Even though a very technical piece of legislation, this has provided additional estate planning opportunities for taxpayers by providing another alternative to the credit shelter or by-pass trust, and allowed for many creative options using various trust instruments to help shelter taxpayers’ from estate taxes and promotes gifting opportunities during lifetime.

In this approach to planning, portability offers the same or better estate tax benefits, the GST exemptions of both spouses are utilized, creditor protection is preserved, and state death taxes and administrative costs are potentially lower. By using various grantor trusts in most cases.

Critics argue that a traditional by-pass trust is superior to utilizing portability, because the traditional by-pass trust’s growth escapes estate tax upon the second spouse’s death, whereas the ported exclusion does not. Another argument is that with portability planning, there may be less asset protection and assets may not pass as the deceased spouse wishes. However, by using a testamentary QTIP trust created by one spouse for the benefit of the other, the assets will pass as that spouse desires after the second spouses death and can be creditor protected. There are options to all of this.

To summarize, there are no right answers in the estate planning area. It is merely what options are most appropriate for you in your particular situation. I recommend that you discuss portability with your estate planning attorney to determine whether your existing plan is adequate for your needs, or whether revising your plan to incorporate some of these changes provided by portability is right for you.

I hope you are having a wonderful summer!!!