Portability and Estate Planning

This is an article from the Law Offices of Cheryl David (https://www.cheryldavid.com/) in Greensboro, North Carolina, that we thought others may find helpful.

Portability allows a surviving spouse to take advantage of a deceased spouse’s unused estate tax exclusion, up to $5.25 million in 2013 and today $5.45 million. The exclusion amount was $5.12 million in 2012 and $5 million in 2010. Portability became permanent as a result of the American Taxpayer Relief Act of 2012 — better known as ATRA.

Not since the “unlimited marital deduction” has there been such a significant change in estate tax laws for married people. Portability potentially eliminates the risk of losing part of the entire lifetime exclusion of the first spouse to die if it was not fully used at the death of the first spouse.

A common estate planning goal of a married couple is to take full advantage of both spouses’ estate tax exclusions, and this is typically done by funding a family trust at the death of the first-to-die with the exclusion amount, leaving the rest to one’s spouse — outright or in trust. Sometimes, though, a spouse’s exclusion is wasted — this can happen if a spouse owns less than his or her lifetime exclusion amount or because the estate documents aren’t tax efficient.

You can rectify this by planning ahead. Consider portability upfront when planning — don’t think of it as a backstop or an afterthought. When incorporating portability, it appears that the important factors are not just the total federal estate taxes. Also in play are distributions of the estate after the death of both spouses, investment returns and length of time between both spouses’ deaths — whether in trust or not. There’s no one-size-fits-all approach. One’s individual circumstances dictate the type of plan to use.

Often when one hears the term “portability plan,” notions of a simple plan are conjured. But while it can sometimes be simple, it’s often much more. Portability plans don’t eliminate the use of trusts — they take better advantage of trusts in all aspects, and further the tax benefits.

Portability can yield a better result. But if some of the $5.45 million gift tax exclusion is used to shield lifetime gifts, the exclusion available to shield testamentary bequests is reduced accordingly.

In years past, estate planning focused on estate, gift and generation-skipping transfer taxes, while income taxes were de-emphasized. But today, the estate tax liability is much less — for some it has decreased from 47 percent to 4.5 percent, which is quite a drop. The estate tax in that particular case has declined about tenfold. And that is an effect of ATRA.

The rub is that same couple’s income taxes have increased because of the higher marginal rates and the so-called 3.8 percent surtax from the Affordable Care Act. Combining these tax changes with portability in mind is what adds to the complexity.

Portability provides for the transfer of a deceased spouse’s unused estate tax exemption — the deceased spousal unused exclusion — to a surviving spouse without inflation adjustments. If a 2016 decedent’s taxable estate is not more than $5.45 million, the DSUE can be used by the surviving spouse. Calculating the DSUE is only the first part of the analysis.

The final IRS regulations clarify what is a “complete and properly prepared” estate tax return for purposes of portability election. Portability addresses only the federal gift and estate tax. Many states have state estate taxes, and there is no portability provision at the state level. But portability can save you more in state death taxes.

Portability intricacies have changed the way estate planning should be approached. Tailor your estate plan to your individual situation and consider portability as a primary tool to be used in the planning stage when discussing your estate with your wealth strategist.