Portability Simplifies Tax Planning For Married Couples

Current Exemption is Now $5 Million per Person ($10+ Million for a Surviving Spouse)

The current estate tax exemption for U.S. citizens and legal residents is now $5+ Million* per person. More relevant to married couples, a surviving spouse can now easily pass up to $10+ Million estate tax-free. We say easily because prior to 2011 the only way to make use of both spouse’s exemptions was through the use of complicated and restrictive sub-trusts. Thankfully, under current law that is no longer necessary. Now, all a surviving spouse must do to receive the benefit of both spouses’ exclusions is to file a timely election when the first spouse passes away.

The New Law of “Portability”:

All of this is made possible by a 2011 law called “portability”. Under portability the surviving spouse is permitted to add the deceased spouse’s unused exemption to theirs. So when the surviving spouse passes away, both exemptions apply for a current potential total of $10 million. Portability, which was made permanent by 2013 legislation, is a welcome, common sense reform because it allows spouses to safely do what most of them have been telling us they want to do for years: leave their estates outright to each other without restriction. (Note: Portability may not be used if the surviving spouse is not a U.S. Citizen.)

It is Still Vitally Important to Seek Competent Advice Immediately at the First Spouse’s Death:

There are many reasons that a surviving spouse should remember to seek competent legal and financial guidance immediately upon the first spouse’s death. Among other things:

  1. Every surviving spouse needs to first determine if portability is still available.
  2. For a surviving spouse to gain the benefit of portability they must elect it on a timely filed 706 estate tax return (within 9 months of the first spouse’s death).
  3. If the survivor is NOT a U.S. Citizen (or in the highly unlikely event that portability has been eliminated) a surviving spouse would need to give serious consideration to funding the Disclaimer Trust while making sure they observe the necessary formalities.
  4. To do any of this requires competent legal and financial advice including a review of the law and your asset base as it exists at the time of the first spouse’s death.

We could go on with more reasons but again the main message you need to remember and take away from this is that it is vitally important for the surviving spouse to seek competent legal and financial guidance immediately upon the first spouse’s death.

Don’t Live in the PastPortability Eliminates The Tax Need for an AB Trust:

As a rule, we are reluctant to waste anyone’s time talking about a subject that is now been made largely irrelevant by the new law of portability – and that would be the AB trust. Yet we mention it because it was used for so many years its hangover mindset still lingers. Prior to portability the AB trust long dominated the scene as the common method for making use of both spouse’s estate tax exemptions. The problem with the AB trust is that the surviving spouse was required to split all the assets and live with lifetime restrictions, limitations, yearly accountings, tax filings and answerability to others. We have even witnessed children use the AB trust as a means to harass their own surviving parent with lawyers, lawsuits and forced court appearances. These are outcomes that very few spouses intended and are the ugly underbelly of the AB trust. Thankfully, surviving spouses no longer have to live with such strictures or threats in order to gain the benefit of two exclusions because with portability the same thing can be accomplished with a simple election. Now the AB trust will only serve to restrict the surviving spouse and burden them with numerous responsibilities and answerability to others – all with no added tax benefit. Unless you are interested in pursuing such a strategy, don’t waste any more time trying to learn about the AB trust because it is an outdated tax-planning dinosaur that belongs in the ash heap of history. (Click here for a full discussion regarding the outdating and problems with the AB Trust format!)

Our Disclaimer Trust Remains as A Safety Valve:

Our married trusts still contain a backup exemption sub-trust called the Disclaimer Trust. The Disclaimer Trust is essentially an available safety valve that the surviving spouse can optionally trigger if the survivor is not a U.S. Citizen or if future circumstances somehow warrant it. However, this option must be exercised within nine months of the first spouse’s death and during that time the surviving spouse must not take ownership of the deceased spouse’s assets (nor start treating the assets as her/his own). This brings us to an important point.

By Signing The Married Couple Worksheet You Confirm That You Want and Understand The Following:

  • You both wish the surviving spouse to inherit all assets outright, without restrictions or limitations
  • You are both comfortable with the surviving spouse deciding whether or not it makes sense to elect portability or fund an exemption sub-trust through the use of disclaimers
  • You both understand that it is vitally important to seek immediate competent legal and financial guidance immediately upon the first spouse’s death.

Restricting The Surviving Spouse:

Those of you who wish to pursue other strategies or restrict or limit the surviving spouse’s use and control of assets should utilize and refer to the separate handout entitled “Restricting the Surviving Spouse”. (If you are contemplating such options we suggest never forgetting you may well be the surviving spouse!)

Restricting the Surviving Spouse (Click Here to Learn More About This)