Estate Planning With Portability: Not A Panacea

Lauren A. Jenkins is a Partner in our Northern Virginia office, David Shayne, Of Counsel, in our Chicago office & William M. Rich, a Partner in our Atlanta office

When Congress resolved the fiscal cliff crisis early this year, it brought permanence to estate, gift and generation-skipping transfer tax laws that had been in flux for over a decade. In short, the American Taxpayer Relief Act of 2012 (ATRA): (1) solidified the applicable exclusion amount at $5 million (as adjusted for inflation), (2) set the transfer tax rate at 40%, and (3) made permanent certain transfer tax provisions, such as portability.

Background on Portability

Since its initial enactment in 2011, portability has received a lot of press as a method to simplify the common estate plan. Before portability, the common estate plan for a married couple with a taxable estate was to create a "credit shelter trust" at the death of the first spouse. That trust would be funded with the deceased spouse's applicable exclusion amount (also known as "exemption amount"). This planning technique sheltered the deceased spouse's exemption amount, permitting the allocated assets, including any appreciation, to escape estate tax at the surviving spouse's death. Therefore, although the credit shelter trust could be used to benefit the surviving spouse and children, its assets would never be subject to estate tax so long as the assets remained in trust.

Portability provides couples with the ability to transfer a deceased spouse's unused exclusion amount (DSUEA) to the surviving spouse. The surviving spouse may use the DSUEA to make gifts during the surviving spouse's lifetime and at death.

Example: John and Jen are a married couple with a combined estate of $7 million. John dies first, leaving all of his assets to Jen, outright and free of trust. If a portability election is made on John's estate tax return, Jen will receive his $5 million exemption. Jen will then have a $7 million estate and a combined exemption of $10 million (her own $5 million exemption and John's $5 million DSUEA), which she can apply against gifts and her estate.

The portability election is made by filing an estate tax return at the first spouse's death and is available for spouses dying after December 31, 2010. As a result, it cannot be used for a spouse who died before that date.

Planning Issues Affected by Portability

The main benefit of portability is its simplicity. Couples whose estates are valued below the combined...