Journal of Financial Planning: July 2013
With the American Taxpayer Relief Act of 2012 (ATRA) establishing portability as permanent, viable estate planning and gifting opportunities have increased. As a planner, you should understand these opportunities to help a married couple appropriately choose between portability and a bypass trust to effectively use both of their applicable exclusions and to protect their families from estate taxes.
Portability involves the carryover of the decedent spouse’s unused exclusion amount (DSUEA) to the surviving spouse. This can be accomplished by simply filing a timely and complete Form 706 estate tax return. The upshot is that a married couple can take advantage of the federal exemption portability provision by shielding as much as $10.5 million of net worth in 2013.
No sophisticated will or trust is needed to process this outright transfer of everything the decedent owns to the surviving spouse. Because DSUEA cannot be given to family members or beneficiaries other than the surviving spouse, it is imperative that you structure assets held in joint tenancy to automatically pass directly to the surviving joint tenants. Talk to the spouses about proper beneficiary designation to ensure that their financial and estate plan operates as intended. Be cognizant that any transfer of assets to children or other family members (or trusts for their benefit) can consume part of the deceased spouse’s exclusion.
File on Time
A portability election can play an unprecedented role in ultimately helping to avoid or reduce a married couple’s estate and income taxes. It is critical for a competent surviving spouse or executor to file an estate tax return within nine months of death (or within 15 months with an extension), even if no tax is owed. The surviving spouse also will need to keep copies of this 706 form in an identified folder for heirs and successor trustees to eventually know the amount of DSUEA that was transferred.
Benefits for Retirement Plans and IRA Assets
It is worthwhile to devise with the portability tool if one spouse owns $8 million of retirement plan and IRA assets, while the other spouse has $200,000 and cannot fund a credit-shelter trust. Because ownership of these retirement accounts cannot be transferred or split between two spouses while living, a spouse can be designated as primary beneficiary of those retirement assets and use portability as a preferred approach for efficient income tax deferral. In addition, portability maintains maximal “stretch” potential for IRA assets. Surviving spouses could facilitate rollovers and select new beneficiaries.
Good for Large Assets
Portability makes planning easier when one spouse has a huge indivisible asset, such as a residence that would be challenging to administer in a trust. Contemplate leaving this very large asset outright to the surviving spouse and rely on portability to optimally use DSUEA at the surviving spouse’s subsequent death. Affirm that this portability decision is made in accordance with the married couples’ wishes and future family goals.
Avoid Sizable Legal Fees
Portability also provides a favorable situation if the surviving spouse’s consumption rate is expected to surpass the assets’ growth rate or if there are sizable legal fees to design a credit- shelter trust. Recognize that there can be significant administrative costs to maintain and retitle bypass trust property.
Avoid Tax Implications
Portability offers strong appeal when a married couple is more interested in obtaining full basis step-up rather than getting appreciation out of their estates. Realize with bypass trusts that there are indirect income tax implications, such as a loss of any step-up in basis at the surviving spouse’s death.
Use the Disclaimer Provision
Working in tandem with credentialed estate planning practitioners, you can strategize to rely on a disclaimer provision, enabling the surviving spouse to disclaim an outright bequest with a provision that the disclaimed assets pass to a bypass trust. Alternatively, you can leave assets to a QTIPable trust and use portability if a full Qualified Terminable Interest Property (QTIP) election is made.¹
A double benefit results when the QTIP trust approach is used to deliver this post-mortem flexibility. Via portability, a reverse QTIP election would be made to use the first deceased spouse’s GST exemption and the assets would get double basis step-up at the death of both spouses.
An optimal approach to leverage planning would empower the surviving spouse with the decision-making ability of whether or not to rely on portability. Facilitate sensible and impactful estate management by keeping the portability option at the forefront of your wealth planning solutions.
Philip Herzberg, CFP®, CTFA, AEP®, is president of FPA of Miami, director of public relations and awareness for FPA of Florida, and a member of the Estate Planning Council of Greater Miami Board of Directors.
- See Steve R. Akers’ April 2013 paper “Heckerling Musings 2013 and Other Current Developments” at www.bessemertrust.com/portal/binary/com.epicentric.contentmanagement.servlet.ContentDeliveryServlet//