Should We Rely On Portability?


When Congress early this year enacted the new estate tax provisions making the $5 million inflation adjusted federal estate, gift and generation-skipping transfer (GST) tax exemptions "permanent," it also made the concept of portability permanent. Portability is a welcome addition to the estate tax laws because it eliminates a common trap for the unwary couple by allowing a surviving spouse to use any unused federal estate tax exemption of the predeceased spouse. This allows the couple to hold their assets as they wish without the need to separate assets into "his and hers," and it may avoid the need for complicated trusts, which some clients do not prefer. The unused exemption inherited by the surviving spouse is referred to as the deceased spousal unused exemption (DSUE) amount. While portability offers a safety net for a married couple who did not engage in traditional estate planning, did not wish to use trusts for a surviving spouse, or did not wish to separate their assets during their joint lives, portability does have some disadvantages that the traditional type of planning with marital and nonmarital trusts does not:

  • the assets may be distributed in a way that was not intended by the deceased spouse
  • there is a lack of protection against future spouses and creditors of the surviving spouse
  • the appreciation in the assets after the death of the first spouse is taxable in the estate of the surviving spouse
  • the GST tax exemption is not portable and relying on portability may limit the ability to pass assets through multiple generations free of estate taxes and GST taxes
  • the DSUE amount is lost if the surviving spouse remarries and is predeceased by his/her second spouse
  • a federal estate tax return must be filed for the estate of the first spouse to die to preserve the DSUE amount, whether or not the estate of the first spouse exceeds the exemption amount
  • as with any tax law, portability could be changed or eliminated by Congress in the future.

Most estate plans that were drafted for married couples prior to 2011 were drafted with traditional marital and nonmarital trusts as well as complex generation-skipping trusts. If simplicity is what you are looking for, portability can provide it. However, we urge every client to have a full discussion with us about the advantages and disadvantages that the new exemptions and portability provisions have brought to the estate planning process.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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