Estate Planning in an Age of Portability

As a result of the American Tax Payer Relief Act of 2012 (ATRA), the estate tax exemption amount is $5.25 million for individuals and $10.5 million for a couple, indexed for inflation. As of this year, “portability”, the ability of a couple to share the exemption so that the surviving spouse’s estate can use any amount not used by the first spouse to die, became permanent. The ability to pass such a large amount to heirs free of estate tax has raised questions about the need for estate planning based on revocable living trusts, or even to have an estate plan.

Before portability, the only way to efficiently used both spouses’ estate tax exemption was by dividing asset ownership between the two spouses and using credit shelter trust (or A/B trust) language in a revocable living trust that took effect on the death of the first spouse.

While portability appears to simplify the estate planning process and create the impression that trust-based plans are unnecessary, portability does not achieve everything that a careful estate plan can. Here are a few of the situations:

  • Probate: a properly funded revocable trust avoids the cost, delay and public exposure of probate. Portability does not affect the need to probate assets owned solely in the decedent’s name;
  • Creditor and inflation protection: a credit shelter trust can provide asset protection from the creditors of the surviving spouse and can also provide more inflation protection. The unused exemption amount transferred to the surviving spouse is not indexed for inflation.
  • Remarriage of the surviving spouse: portability applies to the most recent deceased spouse’s exemption amount. If a surviving spouse remarries and survives the second spouse, the exemption amount of the second spouse is the one available. Experts have recommended using the first deceased spouse for gifts and to create a revocable trust with the second spouse.
  • Tax returns: portability requires filing an estate tax return within nine months of the death of the first spouse, potentially an expensive action.
  • Generation Skipping Tax issues: the GST exemption is not portable, but a credit shelter trust can take advantage of the GST exemptions, allowing inheritance by grandchildren.
  • Blended Family issues: if either spouse has children from a prior marriage, a revocable trust allows the surviving spouse access to the decedent’s assets, but insures that ultimately the children receive their inheritance. Portability results in the surviving spouse having full control over the decedent’s estate
  • Asset Protection: The revocable trust with credit shelter terms can protect assets from the children’s creditors.
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