For maximum benefit, estate planning should happen as a team effort, with CPAs, insurance professionals, financial advisors, and attorneys working together strategically and cooperatively. When it comes to helping married couples plan, today’s strategies need to be considerably more thoughtful than in previous years. Although the estate tax exemption is ever increasing, portability is still an important option, particularly for high net worth clients.
Portability Is Here to Stay
In fact, there’s really no downside to including portability in a plan, other than having to file a federal estate tax return. In the past, planners did not know whether portability was here to stay and were hesitant to rely on its benefits. However, at the beginning of 2013, portability laws became “permanent” under the American Tax Relief Act of 2012 (ATRA). It is now an essential part of estate and financial planning.
Portability provides estate tax planning (without the use of credit shelter trusts) by permitting spouses to transfer their unused estate tax applicable exclusion amount to their surviving spouse. The surviving spouse can then use the deceased spouse’s unused exclusion (“DSUE”) amount for either gift or estate tax minimization or even elimination. In fact, they get to use all of the DSUE plus their own estate tax exclusion amount. This can be very beneficial if assets appreciated greatly after the death of the first spouse, or if the estate tax exclusion amount for the second spouse is lower due to legislative changes.
The Best of Both Worlds
Fortunately, your clients can have the best of both worlds. Portability and trust protections are not mutually exclusive. You can still utilize planning strategies, such as a QTIP (i.e., qualified terminable interest property) trust, providing asset protection and family line protection. So long as the portability election is properly made, the DSUE is reserved for estate tax minimization.
Remember, since the DSUE is a monetary asset, it must be included in estate and financial plans, as well as pre-and post-nuptial agreements.
It is also important to note that some states still have a state estate tax, some with exclusion limits below the federal exclusion. This means that tax planning is still relevant, even if the value of an estate is below the federal estate tax threshold.
What You Need to Know
- An individual can use more than one DSUE. Potentially, the number of DSUEs is unlimited.
- Portability is not automatic. The election must be made on an estate tax return (Form 706) within nine months of death or within any extensions granted.
- Even if the surviving spouse does not have assets in excess of the Section 6018 filing threshold (federal estate tax exclusion amount), it is prudent to consider a protective 706.
- Portability offers federal estate tax planning without requiring an equalization of assets between spouses or their trusts.
- Portability allows a second step up in basis at the death of the second spouse, whereas the credit shelter trust alone provides a step up in basis only at the death of the first spouse.
- Trust planning remains relevant for tax planning, asset protection, and family line protection. In fact, trust planning and portability can be used together and are not mutually exclusive.
How Can You Benefit Your Clients Most?
Of course, you will want to ensure your clients get the best of both worlds: trust planning and portability. We would be happy to consult with you and to provide analyses of your clients’ plans.
Here are some ways you can immediately benefit your clients:
- Contact your married couple clients and offer a financial analysis of their credit shelter planning. Would portability be a better fit for tax purposes? Do the documents include a trust protector or independent trustee to allow for future flexibility if the laws change yet again? Do they know to request a 706 filing at the death of the first spouse?
- Meet with surviving spouses and determine whether there are outstanding income tax implications. Can you achieve a step up in basis? Has a 706 electing portability been filed? Is there still time to file? Is there an exception that would allow late filing? Does the deceased spouse’s trust include a trust protector or independent trustee to allow for tax planning flexibility?
- Offer prenuptial portability counseling to single clients who may be contemplating remarriage.
- Your clients need to know that they will lose their DSUE from their previous spouse if their new spouse dies during their lifetime.
- It may be appropriate to financially compensate a spouse whose DSUE is reduced by remarriage. Life insurance can fund such compensation plans if other liquid assets are not available or if the client prefers.
- A marital agreement can include a provision that guarantees that portability will be elected, as there may be a conflict between a second spouse and children from the deceased spouse’s previous relationships.