Why Estate Planners Should Not Rely on Portability

Portability, the concept of ensuring for the preservation and passing on of a deceased spouse’s estate or gift tax exclusion amount to his or her surviving spouse, appears in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. In the past, estate planners have ensured that a surviving spouse will retain a deceased spouse’s tax exclusions through the use of one or more trusts.

Though it appears that IRC § 2010 acts as a sufficient substitute for trusts, many estate planners are recommending that advisors not rely on portability alone. The reasons estate planners suggest the continued use of trusts, as opposed to relying on portability, are below:

• Portability is not permanent, and it applies only to situations where the deceased spouse and the surviving spouse both die after December 31, 2010 and before January 1, 2013.
• Portability only applies to federal estate tax and does not incorporate possible state estate tax. Additionally, state estate tax regimes are subject to change.
• A deceased spousal unused exclusion amount will not be indexed for inflation starting in 2013. Also, a credit shelter trust that is invested in a portfolio will likely appreciate more than an inflation-indexed deceased spousal unused exclusion.
• The executor of the deceased spouse must make a timely affirmative election for portability to occur. This poses a problem if the deceased spouse’s estate is too small to require the filing of a federal tax return or if the executor fails to make an affirmative election.
• The generation-skipping transfer tax exemption amount is not portable.
• If the surviving spouse remarries and outlives the second spouse, then the original deceased spouses’ unused exclusion will be wasted if the surviving spouse failed to use it by making gifts before the second deceased spouse’s death.
• Trusts provide more benefits than portability, including protecting assets from creditors, managing the distribution of trust funds, and, at the trust’s termination, the ultimate disposition of the trust fund.

See Daniel S. Rubin, Seven Good Reasons Credit Shelter Trusts Remain Relevant: Estate Planners Should Rarely, If Ever, Rely on Portability, Journal of Accountancy, June 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.