Potential Portability Problems

Much ado has been made about the new power in estate planning known as “portability,” and for good reason. Nevertheless, it’s also prudent never to put all your eggs in one basket. So it is with the matter of estate tax exemption portabilility.

I’ve written previous blog posts regarding some of those issues, like when the Journal of Financial Planning upheld the credit-shelter trust over “portability”, but a recent Bloomberg article gives renewed emphasis and food for thought.

As you may know, “portability” is the new ability for a deceased spouse to transfer their unused gift and estate tax exemption amount to their surviving spouse. Provided all the required paperwork is timely filed with the IRS, that effectively allows a married couple to exempt an astounding $10 million from federal taxes for their loved ones without the use of trusts or legal devices.

Bloomberg suggests that it is better to think of portability as a “safety valve” for married couples, especially those whose assets would be entirely covered by the doubled exemption, but not something to be relied upon. The biggest limitation, for one, is that portability exists at the whim of lawmakers. After the budget showdown last December, existence of portability is only guaranteed until the end of 2012 (if that, Congress being the politically fickle animal that it is).

But there is another important caveat Bloomberg touches upon that is worth mentioning. Portability is a power that exists between spouses, but in a world of shifting marriages, divorces, and remarriages that also creates strange limitations. Portability only applies to the last deceased spouse. Accordingly, if a widow remarries, then they could potentially lose that massive exemption (even after their own estate has doubled, creating an estate tax liability). Indeed, if portability isn’t lost and if the widow’s new spouse predeceases after using their own exemption by gifting, then the widow’s estate is in the same tricky situation.

Portability is a wonderful tool to consider, but clearly, too, it is a difficult one with which to make long-term estate tax plans. More information and ideas about trusts can be found in those articles, and of course the best resource is your own legal counsel.

Reference: Bloomberg (August 16, 2011) “Wealthy Take Estate-Tax Exemptions Beyond Grave Until 2013”