Portability – a Magic Provision?

Most people who pay attention to the Estate Tax (or the “Death Tax”) understand that Congress increased the Estate Tax Exemption to $5 million through 2012 in the recent tax bill signed by President Obama on December 17, 2010.  However, the legislation also includes a little-known surprising feature that many estate planning professionals had been lobbying for over the course of many years.  This new feature, known as “Portability,” has the potential to dramatically influence Estate Planning.  In order to understand Portability, it is first important to understand the problem it attempts to resolve.

With regard to a married couple, each spouse has his or her own Estate Tax Exemption.  Historically, if a married couple prefers to leave the entire estate to the surviving spouse, the couple wastes the deceased spouse’s Estate Tax Exemption unless they create a special type of trust known as an “A/B Trust.”  Portability is designed to eliminate the need for a couple to create an A/B Trust in order to use the deceased spouse’s Estate Tax Exemption.

Under the new law, for decedents dying in 2011 and 2012, the surviving spouse has the option to file an Estate Tax return in order to “claim” the deceased spouse’s unused Estate Tax Exemption.  Not only does this feature allow a surviving spouse to “recover” from a lack of proper Estate Tax Exemption planning, but Portability may also be useful for couples who have A/B Trusts in place and for couples who have significant non-trust assets such as IRA’s, qualified retirement plans, and annuities.  Estate Planning attorneys are only beginning to explore methods for taking advantage of this new rule.

Despite this exciting new feature, it is still best practice for a married couple to utilize an A/B Trust.  First, Portability is set to expire in 2013 unless Congress passes additional legislation that extends this rule.  Second, A/B Trust planning provides additional tax-saving features that Portability lacks.  Finally, A/B Trust planning also provides non-tax benefits that appeal to many couples.  Nevertheless, Portability represents an exciting new frontier in Estate Planning that – when utilized properly – will provide new advantages and protections for clients and their families.