A Further Look at Portability

As we discussed last week, there are benefits to the concept of portability in estate planning. However, portability has several limitations.

1. The unused Generation Skipping Tax (GST) Exemption of the spouse dying first is not portable and will be lost if not used. A client who wants to leave assets in trust for the benefit of future generations more remote than the first generation below the client’s will want to use a trust to take full advantage of the GST exemption.
2. Assets passing outright to the surviving spouse likely are subject to the claims of creditors of the survivor, including any subsequent spouse in a divorce. Placing property in trust provide better protection from such claims.
3. A trust provides independent management of the assets, protecting them from the unwise decisions of the beneficiaries. Even clients who believe that their spouse and children are competent managers may want to consider this benefit, because it avoids the potential adverse influence of unwise friends and in-laws.
4. As discussed previously, to secure portability the surviving spouse must file an estate tax return, even if one otherwise would not be due, and that may increase the costs of administering the estate of the first-deceased spouse.
5. The DSUE (Deceased Spousal Unused Exemption) amount is not indexed for inflation. Property passed via credit-shelter trust instead of relying on portability, may appreciate at a rate equal to or greater than inflation, allowing a greater amount of assets to pass free of estate tax when the surviving spouse dies.

        When counseling married couples who expect their combined wealth to fall well below the combined sum of two estate tax exemptions it may take several conversations to reach a decision about whether to use a credit-shelter trust or to rely on portability. In this situation, one option some may choose is to leave the entire estate to the surviving spouse but provide that to the extent the survivor disclaims the bequest, it will pass into a credit-shelter trust for the surviving spouse and, perhaps, for the couple's descendants.        Disclaimer planning that arguably does not save taxes may be a tough decision for a surviving spouse. Counting on the surviving spouse to disclaim in this situation and give up control of the assets may prove foolish.  In client discussions, consideration must be given to the benefits of a basis step-up on the second death.

Most Wills for married couples should now address the question of whether the executor should be required to elect portability, or be given discretion to elect portability. The document should reflect who should pay for the cost of the estate tax return, if it is filed solely to elect portability.  A married taxpayer who plans to use portability should direct his or her executor in his or her Will to file an estate tax return and make the election. Otherwise, the executor may decide not to incur the cost of filing the return

Portability also may become an important discussion for a provision in a prenuptial or postnuptial agreement, to ensure that the surviving spouse is required to use portability to minimize estate taxes on the first death, maximizing estate tax savings on the second death.

As with all estate planning options, the use of portability should be carefully reviewed with clients to make sure that the client takes into account not only estate tax savings, but also their own needs and desires. 

Alan Ferrara