On Dec. 17, 2010, the Tax Relief, Unemployment Reauthorization
and Job Creation Act of 2010 (TRA) was enacted into
law.1 The TRA includes a number of provisions that will
have a significant impact on estate tax planning, including an
increase of the estate tax exclusion amount to $5 million and a
decrease of the maximum tax rate to 35 percent.2 One of
the more surprising aspects of the TRA, however, was the inclusion
of a provision allowing "portability" of a deceased spouse's unused
The portability provision provides that if a decedent's estate is
less than his or her remaining estate tax exclusion, any unused
exclusion amount can be allocated to the decedent's surviving
spouse.3 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 exemption.4
For example, if a husband dies with an adjusted taxable estate of
$5 million and leaves all his assets to wife, those assets qualify
for the marital deduction. The decedent's $5 million exemption
(which went unused because his entire estate qualified for the
marital deduction) can then be allocated to the surviving spouse,
who could die with a $10 million estate without being subject to
the estate tax.
In order for the deceased spouse's unused exclusion amount to be
effectively applied to the surviving spouse, the decedent's
executor must affirmatively make an election on a timely filed
estate tax return.5 Note, however, that unlike the
surviving spouse's own $5 million exclusion, the deceased spouse's
unused exclusion amount is not indexed for
Traditionally, married taxpayers had to plan in order to ensure
that each spouse's exclusion amount would not be "wasted" upon the
death of the first spouse to die. As noted in the above example, a
bequest of all assets to a surviving spouse would qualify for the
marital deduction (and would thus result in no tax upon the death
of the first spouse to die), but the deceased taxpayer's exclusion
amount would go unused, and that unused amount could not be applied
to the surviving spouse's estate.7
Upon the death of the survivor, only his or her individual
exclusion amount could be applied against the adjusted gross
estate. Accordingly, taxpayers have relied on revocable trusts
that, upon death, divide their estates into two shares: one share
that is funded with assets equal to the applicable exclusion amount
(which could be held for anyone, including the spouse) and one
share that is funded with the balance, to be held solely for the
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, allowed 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
At first blush, it may appear that the enactment of the
portability provision in the TRA would eliminate the need for A/B
planning. After all, if the applicable exclusion were to go unused
in the estate of the first spouse to die, it could merely be
transferred to the surviving spouse to be used against his or her
own estate. Portability essentially prevents the exclusion from
being "wasted" in the estate of the first spouse to die, which
would reduce the need for allocation of assets between separate
trust funds in order to preserve the exemption.
While portability undoubtedly provides an excellent "fall back"
option for married taxpayers who fail to plan their estates, it
should not take the place of proper estate planning and should not
replace the A/B trust arrangement that has been relied on for years
prior to the enactment of TRA. In addition to the myriad of non-tax
reasons (probate avoidance, beneficiary creditor protection), there
are several purely tax reasons for an individual to continue to
implement a credit-shelter trust arrangement rather the relying on
The most obvious reason for continued use of the A/B trust
arrangement is that the new TRA portability provision only applies
to federal estate taxes and not state estate taxes.8
Absent proper planning, any exemption afforded to a decedent by an
individual state can still be wasted, thereby increasing the
likelihood for taxation in the estate of the second spouse to
For example, Massachusetts allows the equivalent of a $1 million
estate tax exemption, with no portability.9 A married
couple with an estate of $2 million that plans properly and
implements an A/B trust arrangement can avoid estate taxes
completely upon the deaths of both spouses. If, in the alternative,
upon the death of the first spouse, he or she leaves everything to
the surviving spouse, the $2 million would generate a Massachusetts
estate tax of $99,600 upon the death of the second spouse.
Furthermore, portability only applies to the unified estate and
gift tax exemption and does not apply to the generation skipping
transfer (GST) tax exemption.10 Thus, while portability
could prevent a decedent's estate tax exemption from being wasted,
failure to create an estate plan that allows for allocation of the
GST exemption will result in a tax-
If a married couple desires to have their assets held for
grandchildren and more remote issue, the only way to maximize their
GST exemptions would be for each spouse to implement an A/B trust
(or other, more sophisticated, trust arrangement) to which each
spouse could allocate his or her full GST exemption amount.
In addition, relying solely on portability ignores the potential
for appreciation of estate assets occurring between the deaths of
the first and second spouse. Assets allocated to a credit shelter
trust will be exempt from the estate tax in both estates, even if
the assets in such trust increase exponentially.
If, however, all assets pass to the surviving spouse, subsequent
appreciation of those assets will be included in the surviving
spouse's estate, and that appreciation could increase the surviving
spouse's estate to a level that would subject it to the estate tax.
This problem is compounded by the fact that, unlike the surviving
spouse's exemption, the first spouse's unused exemption amount is
not indexed for inflation.
Take the example of a married couple with a combined $10 million
estate ($5 million per spouse). Absent adequate estate planning,
upon the death of the first spouse, his or her entire estate will
pass to the survivor. Assuming no appreciation in the assets, there
will be no estate taxes on the death of either spouse.
Suppose, however, that the first spouse's estate consisted
entirely of marketable securities that appreciate by 20 percent, or
$1 million, before the death of the second spouse. The second
spouse's estate would then be valued at $11 million, which would
result in a tax of $350,000, even with portability.
If the first spouse had instead allocated assets equal to his or
her remaining exclusion amount to a credit shelter trust, the
appreciation would not be included in the second spouse's estate,
and the entire estate tax could have been avoided. The potential
for tax savings is somewhat diluted by virtue of the fact that the
assets in the credit shelter trust do not receive the step-up in
basis that they would have otherwise received in the estate of the
second spouse to die.
Nevertheless, those assets, upon sale, would generate a federal
tax of 15 percent on any appreciation after the death of the first
spouse, whereas inclusion in the surviving spouse's estate would
generate a tax at a rate of 35 percent.11
In addition to the fact that an estate will be tax-inefficient if
the decedent relies solely on portability for tax planning
purposes, the new law imposes undesirable procedural requirements.
In order for the unused exclusion amount to pass to the surviving
spouse, the executor of the estate of the first spouse to die will
be required to elect this treatment on an estate tax return.
This could result in the decedent's estate filing an estate tax
return in a situation where one would not otherwise be required,
solely to preserve the portability exemption.
For example, if a decedent died with an estate of $4 million, then
technically, an estate tax return would not be required. If,
however, the executor wishes to preserve the $1 million of unused
exclusion amount, the estate would have to file a return.
Filing an estate tax return that is not required will result in
additional costs to the estate, although such costs would likely
not be significant for Massachusetts decedents, as a state return
would be required in any event for estates greater than $1
Furthermore, it is likely, in an abundance of caution, that a
return would be filed in order to make an election even in estates
of decedents who properly implemented an A/B plan during their
lifetimes. What is really troubling, however, is having to rely on
post-mortem action to pass on the remaining exclusion amount to the
surviving spouse rather than planning during life to ensure that
both exemptions are maximized.
If, for whatever reason, a timely estate tax return is not filed,
or if the executor mistakenly fails to make the election to allow
the unused exclusion amount to pass to the surviving spouse, such
exclusion would be wasted. This problem would be avoided with
proper lifetime planning, rather than a reliance on the portability
provisions of the TRA.
And finally, implementing a lifetime estate plan rather than
relying on portability provides certainty in an area that has been,
and likely will remain, unpredictable and in flux. For the time
being, the estate tax provisions, including portability, included
in the TRA are effective only for the years 2011 and 2012, and they
are scheduled to "sunset" thereafter.12
It is not clear whether portability will be extended beyond 2012,
nor is it clear how unused exemption will be treated for a decedent
who dies between now and the sunset but whose spouse dies after the
sunset. It would be unfair for Congress to make ineffective such a
provision, but depending on the U.S. Congressional election cycle
and future budgetary concerns, it is possible that portability
might not be available in the future.
Thus, it makes the most sense to plan accordingly with a
well-drafted estate plan rather than relying on portability in an
effort to reduce federal estate taxes.
1See Tax Relief, Unemployment Insurance
Reauthorization and Jobs Creation Act of 2010, H.R. 4853, 111th
2Id., § 302 (modifying I.R.C. Sec. 2010(c)); §
302 (modifying I.R.C. Sec. 2001(c)).
3Id., § 303.
5Id., § 303(a)(5).
6Id., § 303(a)(3).
7See I.R.C. §§ 2056(a), 2010(c).
See H.R. 4853, § 101.
9See Mass. Gen. Laws. ch. 65C (West 2011).
10See H.R. 4853, § 102, 303.
11Id., § 101.