Posted on July 24, 2011

What is the proper way to plan for taking advantage of the deceased spouse’s portability exemption amount? I have written previously on portability planning here and here.

In traditional estate planning, the client will create an ABC trust where the A Trust is for the Alive Spouse, the B Trust is for the Buried Spouse, and the C Trust is the leftover amount of the deceased spouse’s remaining property not placed in the B Trust. The C Trust qualifies for the marital deduction so there is no estate tax owed on the first death.

As we have discussed previously, however, for many estates, there is no income tax benefit for using a traditional ABC Trust model in your planning.

Instead, we are recommending that client’s consider having an ACB Trust instead. Technically, we want the trust to be drafted to allow for the making of a Clayton election.

Essentially, all of the deceased spouse’s property is allocated to the C trust. Remember, the C Trust qualifies for the marital deduction so there is no estate tax owed on the first death. It also does not use up any of the deceased spouse’s estate tax exemption. This allows for maximum usage of the estate tax exemption by the Surviving Spouse.

The trustee has 15 months from the first spouse’s date of death to claim the marital deduction on a timely filed estate tax return. If the trustee claims the marital deduction, they will also elect portability of the deceased spouses exemption amount on the same return.

If the trustee does not claim the marital deduction on the estate tax return, then the property will be placed in the B trust. Some or all of the deceased spouse’s estate tax exemption will be used. Whatever is not used is still available to be ported over to the surviving spouse.

Using this Clayton Election Strategy gives the surviving spouse maximum flexibility to determine what the best course of action is at the time the decisions matter. Trying to draft an estate plan in today’s ever changing tax climate is like shooting at a moving target and hoping to hit the bullseye.

On the first death, the surviving spouse can take a survey of the assets owned, the tax law in place, and the economic conditions and assumptions going forward to create the best result for themselves and their families at that moment.

This is almost impossible to do today unless clients are going to change and revise their plans every time the law changes beneath them.