New 'portability' doesn't resolve all estate planning issues

Law - 4/15/2011

A well-known epigram says, "May you live in interesting times." For estate planning professionals and their clients, last year certainly was an interesting time, because for 11 1/2 months there was no federal estate tax. Congress failed to address the expiration of the so-called "Bush tax cuts" until Dec. 17, when President Obama signed the Tax Relief Act of 2010.

TRA 2010 contained many surprising estate tax provisions, most notably its generous increase in the estate, gift and generation-skipping tax exclusions (raised to $5 million per U.S. citizen). Perhaps most shocking, however, was a provision allowing for the "portability" of the basic estate tax exclusion between spouses.

Prior to the passage of TRA 2010, married couples who did not engage in careful estate planning ran the risk of losing the estate tax exclusion of the first spouse to die. The loss of the first spouse's exclusion occurred because, generally speaking, married people tend to leave their entire estate to each another. Accordingly, at the death of the first spouse, all of the couple's wealth would be transferred to the surviving spouse (a transfer free from estate tax due to the unlimited estate marital deduction) and at the death of the surviving spouse, only his or her exclusion would remain to shelter assets from estate tax.

Estate planning attorneys have traditionally avoided this negative result by employing "credit shelter" or "bypass" trusts, which utilize the estate tax exclusion of the first spouse by putting it into a trust. This trust has the benefit of being excluded from tax on the estate of the surviving spouse. The surviving spouse could then use his or her own estate tax exclusion at death. Essentially, the goal of credit shelter trust planning is to preserve both estate exclusions for married couples.

The effect of portability is to eliminate the need for this type of sophisticated tax planning. It achieves that result by preserving the exclusion of the first spouse to die and carrying it over to the estate of the surviving spouse. Portability offers the benefits of traditional credit shelter planning without the complications of sophisticated estate planning documents and the legal expense associated with creating them.

At first blush, portability looks like a great deal for taxpayers. Portability seems to offer simplicity and cost savings while simultaneously providing for efficient tax planning. So does portability mean that you no longer need estate planning? Is portability a panacea that meets all of your estate planning needs? Well, as you might surmise because this is coming from a lawyer, the answer to that question is no, and here are a few reasons to support that conclusion.

First, while portability does help in planning to reduce estate taxes, estate planning is not limited to this one issue. It is very broad and involves planning for a myriad of topics including lifetime incompetency, end-of-life health care decisions, guardianship for minor children, children with special needs, charitable giving, trusts for children and grandchildren and the general administration of a financial legacy. Portability solves none of these other issues.

Second, even in the arena of estate tax planning, portability is far from a panacea. While it will help some taxpayers, particularly those who fail to plan, it will not entirely replace traditional estate planning techniques. Here a few problems with portability:

Portability, as set forth in TRA 2010, is a helpful provision for taxpayers and is something you should discuss with your estate planning professional, but it does not dispense with the need for careful and thoughtful estate planning. While portability is a positive development, it is far from a panacea. And stay tuned, because the $5 million tax exclusions apply only through 2012, and things may change thereafter. Portability is not necessarily engraved in stone to last forever.

Justin P. Doyle is with Nixon Peabody LLP. His colleague Anthony Selvaggio assisted with this article.4/15/11 (c) 2011 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail