What the heck is “portability”?

Posted by James R. Schrier, on October 6, 2014
Lafayette IN corporate attorney

James R. Schrier

When developing an estate plan for a husband and wife, back in the old days (before 2011) it was very common to divide assets between them so that, regardless of which one died first, at least one of them would be able to use some of their federal estate tax exemption.  This was especially important back in the 1990s when the exemption was limited to $600,000 and even later after it increased to $1,000,000.  It was, however, often problematic to split assets such that some were in the name of the wife and others in the name of the husband.  Nevertheless, many estate planners found that significant taxes could be saved by structuring an estate plan which split the couple’s assets and then utilized a credit shelter trust upon the death of the first spouse.

Congress provided some relief to couples in 2011 when it enacted laws which established the concept of portability.  Quite simply, portability means that upon the death of the first spouse the surviving spouse can elect to use the portion of the decedent’s federal tax exemption which hasn’t been use.  For example, if Tom dies and leaves all of his property to his wife, Jane, and he hasn’t used any of his $5.3 million federal gift / estate tax exemption on lifetime gifts, his unused exemption could be “ported” to Jane.  Tom’s estate will not be required to use any of the exemption since transfers to spouses are exempt.  Jane then has a lifetime federal estate/gift tax exemption of $10.6 million (Tom’s unused $5.3 + Jane’s own $5.3).  In most cases, she can then transfer that amount either by lifetime gifts or after her death and pay no federal estate taxes.

Since many couples desire to make sure the surviving spouse has adequate resources and flexibility in the use of such resources, portability makes planning much easier. Another benefit of portability is that the assets held by the surviving spouse will receive a step up in basis at the time he or she dies.  Under the “old fashioned” estate planning structures where each spouse owned one-half of the couple’s assets and the assets of the first to die were transferred to a credit shelter trust, the step up in basis was established on those assets when the first spouse died.  By using portability the basis step-up can be delayed until the second spouse dies when, presumably, the value will be higher.

Should everyone use portability?  Probably not.  There are specific situation where it may be more practical or financially prudent to avoid using portability.  Rather, using all of one exemption at the time the first spouse dies may make sense.

Does it make sense to go to the trouble and expense to file the forms to preserve unused exemptions when the couple’s combined assets are less than $5.3 million, or even $2.0 million?  Maybe.  Each situation is different which is why we recommend that a surviving spouse consult with an estate planning attorney before making that decision.

**Reiling Teder & Schrier, LLC is an Indiana Limited Liability Company. The information contained in this website has been prepared by Reiling Teder & Schrier, LLC for informational purposes only, and is not legal advice. The information on this website should not be relied upon to make any decision, legal or otherwise. If you have any specific questions or inquiries regarding any of the information contained in this website, you should consult with an attorney licensed in your state. The information contained in this website pertains only to matters of Indiana law and the laws of other states may be completely different from the laws of the State of Indiana.