Making the Right Choice for What You Can’t Take With You

The American Taxpayer Relief Act of 2012 (ATRA), made the relatively recent estate planning option of portability permanent.

What is portability? Simply put, portability allows the surviving spouse to use any remaining gift/estate tax exemption of his or her deceased spouse. The lifetime gift/estate tax exemption for 2014 is $5.34M per person. Portability allows the surviving spouse to use whatever portion of the exemption their deceased spouse didn’t use, as well as their own exemption amount.

More specifically, if the first spouse to die does not use all of his or her gift/estate tax exemption, the executor of the first spouse’s estate may elect to give the use of the remaining exemption to the surviving spouse. The surviving spouse can then use that exemption amount to make lifetime gifts or to shelter bequests at death. Thus portability provides an alternative to the traditional estate planning technique of using a bypass or credit shelter trust (CST). As a quick refresher, prior to the days of portability, in order to not waste or lose the deceased spouse’s unused exemption amount, a CST was funded with all of the decedent’s remaining estate tax and generation skipping transfer (GST) tax exemption as of his or her death.

A good way to see the pros and cons of whether to go the CST route or rely on portability is to walk through an example. For the purposes of this example, we will assume that the husband dies first as shown in the chart below.