Estate Tax Portability: Do You Still Need a Trust?

Thanks to the recently passed American Taxpayer Relief Act of 2012 (ATRA) we each can now shelter up to $5.25 million ($10.5M for couples) from estate taxes as assets pass to our heirs. The same act also made “portability” a permanent law, which has prompted some to question the need of traditional trusts.

What is “portability” and how does it affect you?

The new portability law allows us to transfer our $5.25M (2013) exemptions to our surviving spouses. Previously, we could have only accomplished efficient use of both spouses’ exemption amounts by dividing asset ownership and creating a credit shelter trust, or an A/B Living Trust.

Portability does simplify the estate planning process but there are many things that you need to watch out for:

  • Remarriage: There is potential to lose a deceased spouse’s unused exemption amount when a more recent spouse passes away. One solution may suggest using the first spouse’s exemption via gift and then creating a credit shelter trust with the second spouse. It is always a good idea to review your estate plan with your attorney before getting remarried.
  • Watch out for appreciated assets: The exemption amount transferred to your spouse under the new “portability” law remains fixed and is not indexed for inflation. More inflation protection could be available under a credit shelter trust.
  • Tax filings: Portability requires the executor to file a return at the death of the first spouse.
  • Generation Skipping Tax (GST) Exemption: The GST exemption is not portable. By contrast an A/B Living Trust could take advantage of the GST exemption amounts for potential transfers to grandchildren.
  • Asset Protection/Prior Marriage: The credit shelter trust may provide asset protection and secure inheritances for children of prior marriages, and if properly drafted protect assets from the children’s creditors.
  • Living Trust avoids Probate: Besides allowing post-mortem portability, a Living Trust avoids the cost, delays and public disclosure that probate entails.

Other traditional planning solutions you may want to evaluate:

  • Annual Gifts: You may want to continue to gift to those other than your spouse to take advantage of the $14,000 (2013) annual gift exclusion per donee. There are also exclusions for transfers for medical and education expenses. This is still a great way to gift assets and reduce your gross estate.
  • As mentioned above the GST Exemption is not “portable” so you may want to consider gifting to lower generations to take advantage of the GST exemption amount now.
  • Spousal Lifetime Access Trust (SLAT): Here one spouse makes a gift in trust and the Trustee has the right to make distributions to the other spouse. Thus the SLAT can be used to provide the other spouse with access to a potential cash flow (from cash values within the trust) while the insured (or insureds’) remains alive.

Bottom line, keep your estate current. We will help assure your assets end up in the hands of those you intend with the least amount going to taxes and legal fees. We recommend a review every 3-5 years or upon a life changing events (marriage, divorce, or death).

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