Potential Portability Problems

Portability has become a popular topic among the estate planning set, and I found this recent post to be valuable.  The author of the commentary is Lizette Sundvick, who practices in the sate of Nevada.  And her comments are based on the article  “Wealthy Take Estate-Tax Exemptions Beyond Grave Until 2013”  Bloomberg (8-6-11)

The Bloomberg article notes that:  Wealthy individuals in the U.S. will find it easier to cut their estate-tax bill as a result of a provision for using their deceased spouses’ exemption credit.

Much ado has been made about this new power in estate planning known as “portability,” and for good reason. Nevertheless, it’s also prudent never to put all your eggs in one basket. So it is with the matter of estate tax exemption portability.

As you may know, “portability” is the new ability for a deceased spouse to transfer their unused gift and estate tax exemption amount to their surviving spouse. Provided all the required paperwork is timely filed with the IRS, that effectively allows a married couple to exempt an astounding $10 million from federal taxes for their loved ones without the use of trusts or legal devices.

Bloomberg suggests that it is better to think of portability as a “safety valve” for married couples, especially those whose assets would be entirely covered by the doubled exemption, but not something to be relied upon. The biggest limitation, for one, is that portability exists at the whim of lawmakers. After the budget showdown last December, existence of portability is only guaranteed until the end of 2012 (if that, Congress being the politically fickle animal that it is).

But there is another important caveat Bloomberg touches upon that is worth mentioning. Portability is a power that exists between spouses, but in a world of shifting marriages, divorces, and remarriages that also creates strange limitations. Portability only applies to the last deceased spouse. Accordingly, if a widow remarries, then they could potentially lose that massive exemption (even after their own estate has doubled, creating an estate tax liability). Indeed, if portability isn’t lost and if the widow’s new spouse predeceases after using their own exemption by gifting, then the widow’s estate is in the same tricky situation.

We all know (or should know) that relying on fickle politics is addressing the temporary.  On the other hand, we encourage you to investigate every opportunity that arises for your use here and now.

Portability can be a worthwhile tool to consider.  On the other hand it can be a daunting issue to incorporate into your long-term estate tax plans.  As these new planning tools surface, it is advisable to make sure your estate plan is up-to-date and fully addresses your desires regardless of what "portability "may or may not offer.  Please call to schedule a meeting.