Elaine Hightower Gagliardi on the Deceased Spousal Unused Exclusion Amount: Planning with Portability

Elaine Hightower Gagliardi on the Deceased Spousal Unused Exclusion Amount: 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. This EIA discusses the concept of spousal portability, and how planners should consider implications of the increased applicable exclusion amount and portability on estate planning choices.

[1] Introduction

Spousal portability of the applicable exclusion amount promises estate planning simplicity. 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.

A measure of complexity and uncertainty inherent in the concept as enacted makes portability an unreliable planning tool at best. The vagaries of the quest for a balanced budget prevent any certainty of its availability beyond 2012. While President Obama's budget proposals support making portability permanent, given the track record of Congress, the possibility exists that, at least for some period of time, the amendments made by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the "2010 Tax Act") will sunset and, even if any extender is made retroactive to January 1, 2013, that budget constraints will prevent permanent enactment of portability. Even were portability to be made permanent, concerns over possible abuse caused Congress to insert a very real element of uncertainty in the ability of the surviving spouse to use the ported applicable exclusion amount. The surviving spouse may only use the unused applicable exclusion amount of the "last" deceased spouse, resulting in the possibility of a loss of the ported amount in the event of remarriage. This "now you see it, now you don't" characteristic of portability makes it a less than optimal planning tool. Nevertheless, planners should carefully consider whether portability can be used to the advantage of clients given stated testamentary desires.

[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.

(footnotes omitted) 

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