Blogging from Heckerling - Portability

Blog Post 2 of 4

Continuing with our reports from the Heckerling Conference held during January, 2014

Thomas W. Abendroth of Schiff Hardin LLP spoke about portability, the estate tax provision that allows a surviving spouse to inherit his or her predeceased spouse’s unused estate tax exclusion (“DSUE”).  He reminded us that the surviving spouse can only use the unused exclusion of her last deceased spouse.  This means that if she remarries and her second spouse predeceases, she is only entitled to the second spouse’s DSUE.   Nevertheless, a surviving spouse who outlives multiple spouses can use the DSUE of each of those deceased spouses: She just needs to make lifetime gifts using the DSUE of her most recently deceased spouse before her next spouse predeceases.  Interestingly, the surviving spouse will be deemed to use the DSUE before her own gift tax exclusion. 

Mr. Abendroth discussed the advantages of both portability and a credit shelter trust.  Portability affords the following benefits: (1) simplicity, as it allows a married couple to leave property to each other without losing the estate tax exclusion of the first spouse to die; (2) additional basis step-up because the assets passing to the surviving spouse receive another step-up at the surviving spouse’s death; and (3) avoiding the complications associated with funding a credit shelter trust with a residence or retirement plan.  In contrast, a credit shelter trust offers the following advantages: (1) shelters future appreciation in trust assets from estate tax in the surviving spouse’s estate; (2) allows the predeceasing spouse to use his GST exemption, as that exemption is not portable; (3) the DSUE amount of the first predeceased spouse won’t be lost if the surviving spouse remarries and her second spouse dies; (4) trust assets are insulated from creditors; and (5) funding the credit shelter trust with difficult-to-value assets reduces the audit risk with respect to those assets at the second death. 

Mr. Abendroth indicated that portability is more attractive for couples whose assets are unlikely to exceed twice the estate tax exclusion.   However, if they reside in a state with a low state estate tax exclusion, such as New York ($1 million) or New Jersey ($675,000), he suggested that the couple may want to fund a credit shelter trust using the state estate tax exclusion amount on the first spouse’s death to save state estate tax.  Furthermore, where a couple has assets above or near the threshold for incurring estate tax and the first spouse to die leaves unused exclusion, portability can be used to preserve the unused exclusion for the surviving spouse.  This often happens when a couple fails to retitle assets or the nature and size of their assets don’t allow them to do so, and they can’t fully fund the credit shelter trust upon the first spouse’s death.  Other than these certainties, whether to use portability depends upon the unique facts and circumstances of each client, and should be considered as another planning tool.