Should We Rely on Portability?

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By Richard M. Schwartz, Esq., and Justin C.
Esposito, Esq.

Pepper Hamilton LLP, Philadelphia, PA

When Congress early in 2013 enacted the new estate tax
provisions making the $5 million inflation adjusted federal estate,
gift and generation-skipping transfer (GST) tax exemptions
"permanent," it also made the concept of portability permanent.
Portability is a welcome addition to the estate tax laws because it
eliminates a common trap for the unwary couple by allowing a
surviving spouse to use any unused federal estate tax exemption of
the predeceased spouse.  This allows the couple to hold their
assets as they wish without the need to separate assets into "his
and hers," and it may avoid the need for complicated trusts, which
some clients do not prefer. The unused exemption inherited by the
surviving spouse is referred to as the deceased spousal unused
exemption (DSUE) amount.  While portability offers a safety
net for a married couple who did not engage in traditional estate
planning, did not wish to use trusts for a surviving spouse, or did
not wish to separate their assets during their joint lives,
portability does have some disadvantages that the traditional type
of planning with marital and nonmarital trusts does not:

  •   the assets may be distributed in a way that was not
    intended by the deceased spouse
  •   there is a lack of protection against future spouses and
    creditors of the surviving spouse
  •   the appreciation in the assets after the death of the
    first spouse is taxable in the estate of the surviving spouse
  •   the GST tax exemption is not portable and relying on
    portability may limit the ability to pass assets through multiple
    generations free of estate taxes and GST taxes
  •   the DSUE amount is lost if the surviving spouse remarries
    and is predeceased by his/her second spouse
  •   a federal estate tax return must be filed for the estate
    of the first spouse to die to preserve the DSUE amount, whether or
    not the estate of the first spouse exceeds the exemption amount
  •   as with any tax law, portability could be changed or
    eliminated by Congress in the future.

Most estate plans that were drafted for married couples prior to
2011 were drafted with traditional marital and nonmarital trusts as
well as complex generation-skipping trusts. If simplicity is what
you are looking for, portability can provide it. However, we urge
every client to have a full discussion with their tax advisor about
the advantages and disadvantages that the new exemptions and
portability provisions have brought to the estate planning

For more information, in the Tax Management Portfolios, see
Pennell, 843 T.M.
, Estate Tax Marital Deduction, and
Streng, 800
, Estate Planning, and in Tax Practice Series,
see ¶6350, Estate Planning.

© Pepper Hamilton LLP