Regardless of the size of your estate, planning ahead is essential if you want to bypass paying tax on the assets you’ve accumulated over your lifetime. The new hype in the realm of estate tax is portability. Portability was introduced in 2010 and became permanent in 2013 with the signing of the American Taxpayer Relief Act. Portability makes it possible for a spouse to carry over any unused estate tax exemption of their deceased spouse and add it to their own.
Portability does not change the fact that you can give an unlimited amount to your spouse. However prior to portability, if a decedent’s entire estate was left to their spouse then the first spouse’s exclusion was lost. To avoid this problem, you either had to leave assets to someone other than your spouse or set up a special trust.
Portability does away with the need to retitle assets in order to fully use each spouse’s exclusion amounts. It also provides for a second step-up in basis for the assets left in the surviving spouse’s estate upon his or her death, and it works well for assets that can’t easily be managed within a bypass trust (such as houses or retirement accounts). At first glance, portability appears to simplify and reduce the need for traditional estate tax planning, but of course, there are various drawbacks to portability:
• There is no inflation adjustment for the deceased spouse’s unused exclusion (DSUE), therefore future appreciation on assets may be exposed to estate tax
• There is the potential of losing the DSUE from a first spouse, if the surviving spouse remarries
• There is no portability of the Generation Skipping Transfer Tax Exemption
• States may not offer the benefit of portability, thus creating additional state estate tax
So in fact, there are many benefits in continuing to make use of the traditional estate tax planning techniques in spite of portability, including:
• Maintaining flexibility and control over distributions and assets
• Protecting against disgruntled spouses, creditors and others who may sue your heirs
• Preventing future stepfathers or stepmothers from cutting your children out, and
• Passing your wealth onto your grandchildren, rather than your children
Finally, it is important to note that in order to take advantage of portability, at the death of the first spouse an estate tax return must be filed, even if no tax is due. Although there is cost associated with having an estate return prepared it could help save significant tax dollars if you find yourself administering an estate which did not have the necessary planning during the decedent’s life time.
If you would like assistance in understanding more about what portability may mean for you or your current estate tax plan, please reach out to your tax consultant at MKS&H.
About MKS&H: McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs. Please visit www.MKSH.com for more information.