Portability allows a surviving spouse to take advantage of a deceased spouse’s lifetime Federal estate tax exclusion. The surviving spouse can use his or her last deceased spouse’s exclusion either for gifts or for estate tax purposes at the surviving spouse’s subsequent death. This is a relatively new tool, introduced in 2010 and made permanent in 2013. To use this tool the first spouse’s personal representative makes an appropriate election on a timely filed estate tax return that computes the unused exclusion amount. The exclusion can be lost if the surviving spouse remarries before it is used.
Whether to rely on portability for your estate plan is a complex and difficult analysis. The size of your estate, desired distribution scheme and control preferences, income tax considerations, family situation, creditor protection and estate growth assumptions will often dictate the use of this tool. Although the purpose of portability is to simplify estate planning, the possibility of relying on portability makes the planning process more complicated.
The estate planning process is more complicated because an additional issue must be addressed for married couples with estates between $5,000,000 and $10,000,000. The question is whether to use portability or a credit shelter trust to take advantage of the first spouse’s exclusion? Factors indicating relying on portability include (a) a competent spouse who can manage assets, (b) a first marriage or no children existing by prior marriage of either spouse, (c) clients who are more interested in income tax basis step up at the second spouse’s death than getting future appreciation out of their estates, and (d) there is a residence or other assets that would be difficult to administer in a trust. There are other special situations in which portability may offer distinct advantages, but those are beyond the scope of this page.
By contrast, factors indicating using a credit shelter trust include: (i) the desirability of omitting future appreciation from the surviving spouse’s estate, (ii) being able to include persons other than the surviving spouse as a trust beneficiary, (iii) avoiding (or minimizing) inequities in a blended family situation, (iv) the desire for asset protection planning and (v) using the deceased spouse’s GST exemption.
The Wait and See Approach
The wait and see approach utilizes planning that leaves the surviving spouse with the decision of whether or not to rely on portability.
Alternatives are (1) to rely on a disclaimer provision (allowing a surviving spouse to disclaim an outright bequest with a provision that the disclaimed assets pass to a bypass trust ), or (2) to leave assets to a QTIPable trust; portability would be used if a full QTIP election is made (and the first deceased spouse’s GST exemption could be used by making a reverse QTIP election under §2653(a)(3)), and a bypass trust approach would be used if a partial QTIP election is made with a “Clayton” provision (so that the unelected portion would have more flexible distribution provisions than a single beneficiary mandatory income interest trust for the surviving spouse). Obviously, careful drafting must be used to implement this approach.