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July 16, 2020 / The Merrill Anderson Company
Three mistakes in portability planning

Three mistakes in portability planning

The increase in the amount exempt from federal estate tax to $10 million per taxpayer (plus inflation adjustments) has been a game changer for estate planners. Nearly as important, when it comes to estate plans for married couples, is the advent of the portability of the estate tax exemption, the Deceased Spouse’s Unused Exemption (DSUE). By simply filing an estate tax return at the death of a spouse, even if no estate tax is due, the estate tax exemption for the surviving spouse may roughly double. Such a filing is not required, but it would be a good precaution to take. The future course of the family fortune as well as the federal transfer tax regime are difficult to predict, so any step that could save substantial tax dollars in the future should at least be considered.

Don’t accidentally elect out of portability

Illustration of house with financial symbols and an hourglassFailure to file an estate tax return for the first spouse to die will forfeit the DSUE for the survivor. The estate tax return must be filed within nine months of death, but a six-month extension may be granted. Timely filing Form 4768 will gain an estate an automatic six-month extension. Estates smaller than the statutory threshold for filing may apply for a discretionary extension of time even beyond the normal 15-month period.

Don’t assume that no estate tax planning will be needed

If total family wealth is about $10 million, a couple may assume that a single federal exemption amount will be sufficient to shield the family fortune from the federal estate tax. Thus, they might decide to forego planning for the portability election as not worth the expense of hiring a professional to file an otherwise unnecessary estate tax return.
There are two potential defects with this plan. First, the amount exempt from federal estate tax could be sharply reduced in the future—it is scheduled to fall roughly in half in 2026 already, and some Democratic presidential candidates advocate for accelerating that change.
Second, the surviving spouse may live for decades, and may not consume all of the income from that $10 million. If asset appreciation plus savings comes to just 7.2% annually, the family fortune will grow to $20 million in ten years, $40 million in 20 years. Inflation adjustments to the exempt amount are unlikely to keep up with that.

Don’t lose the DSUE through remarriage

A surviving spouse may have a DSUE only from his or her most recently deceased spouse. Assume, for example, that a widow with $12 million in assets has a $5 million DSUE through her late husband. She remarries a widower who has $10 million, and through a prenuptial agreement they waive their marital rights to each other’s assets. The second husband dies, leaving his entire estate to his descendants, using up his estate tax exemption. The widow’s DSUE from her first husband will be extinguished. Her heirs then may be exposed to substantial estate taxes.
It is entirely possible that when she consulted her lawyers about the pre-nup, they might have recommended against the marriage at all, considering the tax consequences.

Summing up

The advent of portability, coupled with larger exemptions, has allowed much greater flexibility in estate planning. However, that is not quite the same thing as simplicity. There remains a wealth of considerations to weigh when finding the best way forward in a challenging environment.

(March 2020)
© 2020 M.A. Co. All rights reserved.
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