Planning With Portability

Planning With Portability

Portability with respect to the Deceased Spousal Unused Exclusion Amount makes portability an unreliable planning tool at best; nonetheless, planners should consider whether portability can be used to the advantage of clients given stated testamentary desires...

[1] Introduction

Spousal portability of the applicable exclusion amount promises estate planning simplicity. [Taxation of Wealth Transfers Within a Family: A Discussion of Selected Areas for Reform, JCX-23-08 at 10 (April 2, 2008) ("[A]llowing for portability between spouses of unused exemption arguably would contribute to simplicity and facilitate compliance with the law, because it largely would eliminate the need for couples to employ the credit shelter trust strategy or to monitor and adjust the titling of assets.")] No longer will a married couple need to make lifetime transfers of assets to ensure that each spouse holds sufficient assets to fully use the unified credit of each regardless of the order of death. A couple can also avoid the attendant costs of placing property in a credit shelter trust following the first death. Portability achieves these purposes and at the same time aligns with testamentary goals of clients when all the children of the couple are from the marriage, neither spouse anticipates remarriage following the first death, and, on the last death, the couple plans to pass assets outright to children. It, however, does not provide the same ease of planning in a second marriage situation, or in the event of generation skipping transfer tax planning. Nor, as enacted, does it necessarily provide the promised simplicity.

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[2] Planning With Portability

After 2010, planners should consider implications of both the increased applicable exclusion amount and portability on estate planning choices. The combination of portability and a significantly increased applicable exclusion amount of $5 million, as indexed for inflation, makes transfer tax implications of little or no significance for most couples. Arguably, only those couples with aggregate assets nearing or exceeding the amount of the applicable exclusion need pay special attention to the impact of portability and wealth transfer taxes. The choice to include tax planning provisions as part of the estate plan depends on what clients see when they look into the proverbial crystal ball. Clients with assets significantly less than the current $5 million applicable exclusion amount may nevertheless choose to include tax planning provisions if they foresee a return in 2013 to the $1 million applicable exclusion amount, or even the $3.5 million threshold.

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With the advent of portability, income tax consequences become a critical factor in the choice of estate plan. Assuming an economy where more often than not assets appreciate in value, the choice between an outright gift to the surviving spouse or a gift in the form a QTIP trust and the use of the classic credit shelter trust depends on the income tax cost relative to the estate tax cost inherent in the planning choice.

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Where the married couple's assets do not exceed in the aggregate the applicable exclusion amount and it is unlikely that the assets will ever do so, tax planning will not contribute to the choice of estate plan. It is unlikely that a DSUE election would prove economically effective in this circumstance. However, where the assets of the married couple in the aggregate conceivably may at some point exceed the applicable exclusion amount, on the death of the first spouse consideration should be given to making the DSUE election. The decision to use a trust in this instance depends on the client's testamentary desires to control ultimate disposition of property on the death of the surviving spouse, and the client's willingness to incur ongoing costs of trust administration. Based on the example above, an outright gift to spouse in conjunction with the DSUE election would yield appropriate estate and income tax planning consequences assuming the DSUE amount remained available for use at the surviving spouse's death.

In the event that a couple's aggregate assets exceed the applicable exclusion amount, careful consideration should be given to the tax implications of the estate plan. Portability alleviates the necessity of making lifetime transfers to ensure full use of both spouse's applicable exclusion amounts regardless of order of death if the estate of the first spouse to die makes the DSUE election. To provide maximum flexibility in light of the uncertainty inherent in the DSUE election and in the ultimate applicable exclusion amount after 2013, consideration should be given to use of a disclaimer trust where the disclaimer trust is structured so as to allow the QTIP election if in fact one is allowed so that in conjunction with portability a step up in basis occurs at the surviving spouse's death for the assets held in trust. A disclaimer trust allows flexibility of waiting to make estate planning decisions until the first death. If the couple wishes to control ultimate disposition of assets on the death of the survivor in all events, the couple should instead consider use of a QTIP trust, or if appropriate in light of testamentary desires, use of a credit shelter-QTIP trust plan.

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The discussion of planning alternatives makes evident the importance of a QTIP trust to achieving maximum flexibility to control ultimate disposition of assets and to make tax decisions using portability. The very wealthy can clearly use the QTIP trust to achieve the best of all possible worlds. It remains uncertain if couples whose assets do not exceed the applicable exclusion amount can take equal advantage of the benefits of a QTIP trust. In light of the continued uncertainty as to the ultimate applicable exclusion amount, tax rates, and the availability of the DSUE amount, it would be appropriate for Treasury, or if deemed necessary Congress, to consider clarifying that client's may make the QTIP election for purposes of portability planning regardless of whether the client dies with a taxable estate. Such a clarification would level the playing field for all taxpayers.

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LEXIS users can access the complete commentary HERE. Additional fees may apply. (Approx. 7 pages)

RELATED LINKS: For further discussion on the regulations relating to partnership debt-for-equity exchanges, see Elaine Gagliardi on The Deceased Spousal Unused Exclusion Amount: Now You See It, Now You Don't

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