Inter Vivos Trusts and Portability

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By Richard S. Franklin and Lester B. Law

McArthur Franklin, LLLP, Washington, DC, and U.S. Trust, Bank of America Wealth Management, Naples, FL, respectively

For the past 30 years, traditional by-pass trusts have been used by many married couples with taxable estates primarily to take full advantage of both of the spouses' applicable exclusion amounts. Assuming that portability remains a mainstay in the federal transfer tax system, it furthers the evolution away from traditional by-pass trusts in favor of trusts created inter vivos that utilize the applicable exclusion amounts.

When considering the planning potential of portability, existing analyses have compared traditional by-pass trusts to using a portability driven plan, wherein essentially the estate tax savings of a traditional by-pass trust are compared to the increased income tax basis that would be available if the entire estate receives a step-up in basis upon the surviving spouse's death in a portability driven plan. The more important comparison, as an upcoming article will explain, is the traditional by-pass trust plan, which is not a grantor trust, compared to using grantor trusts funded with applicable exclusion amounts. Portability will enable the creation of such grantor trusts as to the surviving spouse and it is for this reason that portability is a game changer.

In the upcoming article, Portability's Role in the Evolution Away from Traditional By-Pass Trusts to Grantor Trusts, to be published in the March 2012 issue of the Tax Management's Estates, Gifts and Trust Journal, Richard Franklin and Lester Law explain that certain inter vivos trusts are a better estate planning option for couples and portability's role in enabling this new approach to planning the use of applicable exclusion amounts. As explained in the upcoming article, by using a combination of inter vivos QTIPs, testamentary QTIPs and irrevocable gift trusts the advantages of a traditional by-pass trust (i.e., estate tax protection, use of both spouses' GST exemptions, creditor protection and disposition control) can be obtained while at the same time obtaining the benefits of a grantor trust. The authors argue that portability creates new avenues to accomplish this result and arguably completes the evolution to grantor trusts for the use of all applicable exclusion amounts, thereby making traditional by-pass trusts a relic of the past.

For more information, in the Tax Management Portfolios, see Streng, 800 T.M., Estate Planning, Peebles and Janes, 822 T.M., Estate, Gift and Generation-Skipping Tax Returns and Audits, Pennell, 843 T.M., Estate Tax Marital Deduction, and Lischer, 845 T.M., Gifts, and in Tax Practice Series, see ¶6350, Estate Planning.