Taxation Law

Taxation Law

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Portability Should Not Replace Lifetime Transfer Tax Planning by Brian T. Liberis, Esq

by Lisa M. Rico , posted Thu, Feb 3, 2011 5:08 PM

Portability Should Not Replace Lifetime Transfer Tax Planning

By Brian T. Liberis, Esq.

Gilmore, Rees & Carlson, P.C.

On December 17, 2010, the Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 (TRA) was enacted into law.  The TRA included a number of provisions that will have a significant impact on estate tax planning, the most surprising of which was a provision allowing Aportability@ of a deceased spouse=s unused estate tax exclusion amount.  Portability provides that if a decedent=s estate is less than his or her remaining exclusion amount, the balance can be allocated to the decedent=s surviving spouse.  The surviving spouse can then apply this exemption to his or her own estate and lifetime gifts, in addition to his or her own estate and gift tax exemptions.

Prior to the enactment of TRA married taxpayers had to plan in order to ensure that each spouse=s exclusion amount would not be Awasted@ upon the death of the first spouse to die.  Traditionally, taxpayers have relied on revocable trusts that, upon death, divide their estates into a credit shelter share and a marital share.  This arrangement (which is often called an A/B trust plan or credit shelter trust plan), in conjunction with equalizing the value of each spouse=s estate during life, allows each spouse to fully utilize his or her exclusion amount, thereby eliminating estate taxes in the estate of the first spouse to die and eliminating or minimizing taxes in the estate of the second.


Upon first blush, it may appear that portability would eliminate the need for A/B trust planning because it essentially prevents the exclusion from being Awasted@ in the estate of the first spouse to die and therefore reduces the need for allocation of assets between separate trust funds in order to preserve the exclusion amount.  While portability undoubtedly provides an excellent Afall back@ option for decedents who fail to properly plan their estates, it should not replace the A/B trust planning that has been relied on for years prior to the enactment of TRA.  There are several purely tax-driven reasons for an individual to continue to implement an A/B trust arrangement rather the relying on portability, including:

$                   Massachusetts Estate Tax: portability only applies to federal estate taxes and not to state estate taxes.  A/B trust planning is still necessary to minimize or eliminate Massachusetts estate taxes.

$                   Generation Skipping Transfer Tax: portability only applies to the estate and gift tax exemption, not the GST exemption.  Proper planning via A/B trusts and other arrangements is still required to maximize each spouse=s GST exemption.

$                   Appreciation: assets allocated to a credit shelter trust will be exempt from tax in the estate of both spouses, regardless of the appreciation of the assets between each spouse=s death.  If, however, upon the first death all assets pass to the surviving spouse, subsequent appreciation of those assets will be included in the estate of the second spouse to die, which could cause that spouse=s estate to incur additional estate taxes.


$                   Post-mortem Action: taking advantage of portability requires post-mortem action by the executor (often the surviving spouse).  If the executor fails to timely file an estate tax return or neglects to make the required election, the exemption will be wasted.  This problem could be avoided with proper lifetime planning.

$                   Certainty: the provisions of the TRA, including portability, are only effective until December 31, 2012, and it is unclear whether they will be extended beyond that date.  Implementing a lifetime plan rather than relying on portability provides certainty in an area that will likely remain in flux.

Thus, while the portability provisions of the TRA provide an opportunity for spouses who fail to plan properly during their lifetimes to make greater use of their estate tax exemptions, it should never be used as an affirmative planning technique.   In addition to the myriad of non-tax reasons (probate avoidance, beneficiary creditor protection, etc.) for the implementation of an estate plan, individuals should continue to rely on A/B trusts and other trust arrangements to fully maximize all of their estate, gift and GST exemptions and to avoid the pitfalls associated with portability.

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