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In the wake of the 2013 tax act, the great estate planning question confronting many couples in planning to reduce or eliminate federal estate tax is whether to rely on “portability”— the ability of a surviving spouse to “port over” the unused estate/gift tax exemption left by his or her deceased spouse — or instead to implement or maintain a bypass (or credit shelter) trust structure in their planning.  The usual considerations are:

• Considerations relating to the overall family situation. Examples:
  • How each spouse feels about the other possibly remarrying and leaving assets to a new spouse
  • Whether this is a first or later marriage
  • Whether there are children by this marriage or previous marriages
  • How much (if any) that each spouse intends his, her, or their children to inherit
• Considerations relating to the personalities, skills, and weaknesses of each spouse. Examples:
  • Whether each spouse is capable of investing generally (or the special assets particular to this family) on his or her own
  • What each spouse’s spending habits would be if assets were owned outright vs. in trust
  • Whether the trust should protect against each spouse’s creditors
  • Whether each spouse could be susceptible to negative influences from others
• Considerations relating to transfer taxes (estate, gift, and generating-skipping transfer tax). Examples:
  • Whether asset appreciation is a concern (assets in a credit shelter trust — including their growth — are permanently exempt from estate tax in surviving spouse’s estate, but the exemption “ported” over from a deceased spouse won’t be inflation-indexed, such that asset growth can effectively diminish the ported-over exemption)
  • Whether the surviving spouse might remarry (if the surviving spouse also outlives his or her new spouse, the exemption from the first deceased spouse can’t be ported over)
  • Whether state estate taxes are a concern
  • Whether there are valuation concerns with the assets going to the spouse (the statute of limitations doesn’t begin run on the first spouse’s estate tax return until the surviving spouse’s estate tax return is filed)
  • Whether generation-skipping transfer tax planning is contemplated (unlike unused estate and gift tax exemption, unused generation-skipping transfer tax exemption can’t be ported over to the surviving spouse)
• Considerations relating to income taxes. Examples:
  • Whether a step-up in income tax basis is desired on the death of each spouse
  • Whether funneling the assets through a trust would increase income taxes

For added flexibility, clients sometimes implement a disclaimer structure in their planning, so that the surviving spouse can choose whether to rely on portability (allowing assets to pass to them outright), bypass trust planning (by disclaiming assets into a bypass trust), or some combination of the two.  The surviving spouse will have nine months from the other spouse’s death to make this decision.

Consult your estate planning advisors with any questions.  Visit The Connolly Gallagher Trust & Estate page by clicking here.