Can ‘Portability’ Simplify Your Estate Planning?

 New estate tax laws¹ allow a surviving spouse to elect ‘portability’ and carry forward the Deceased Spousal Unused Exclusion Amount- known as the DSUEA.

For estates over $5 million in assets, leaving everything to the survivor and relying on “portability” offers simplicity, and the opportunity for another basis adjustment (hopefully a “step up”) at the surviving spouse’s death.

Retirement accounts, such as IRAs, are especially good candidates for the ‘portability’ election, since the surviving spouse will also be able to minimize income tax by a ‘spousal rollover’, as long as s/he (rather than a Trust) is the designated beneficiary.

Significantly, an estate tax return must be filed by 9 months (or other extension deadlines) following date of death to claim the portability benefit, even though such a return would not otherwise be required.

In many situations, however, there are often good reasons to continue traditional ‘A-B-C’ Trust plans, and not rely solely on portability:

• The DSUEA is not indexed for inflation and thus may not protect the increasing value of the survivor’s estate.
• The DSUEA will be lost if the surviving spouse remarries and survives his or her next spouse. 
• There is no portability for the generation skipping transfer tax (GST) exemption, which may only be preserved by a separate Trust for the deceased spouse’s assets.
• If the decedent moves to a state (not including California) with a state estate tax, relying on portability will lose the benefit of the state’s estate tax exclusion and may increase overall taxes for the survivor’s estate.
• Most importantly, a separate Trust holding the deceased spouse’s assets offers greater protection for the intended beneficiaries.  In a blended family situation, a surviving spouse who receives the entire estate may change the Trust plan to favor some beneficiaries more than others – possibly in ways the decedent-spouse would not have wanted.  This can unfortunately lead to hurtful and costly legal disputes.

Planning to use the flexibility of Portability with a Trust plan creates even more opportunities.  The surviving spouse may use the DSUEA in a gifting plan to save additional taxes for future generations.

These questions raise important new issues for discussion at our client meetings.  For further information, or if you wish to review your existing Trust plan, please contact our office at 530-272-4292 or email through our website at www.jwilkerson.net.

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Tax Planning by Jennifer