Posted on July 10, 2011

It is easy to find problems with something or to claim that it will not work. Previously, I blogged about the arguments that many attorneys are using against portability in an effort to avoid change.

It is much more difficult to champion something, to investigate, and to find a way to explain how something may be beneficial to a client.

There is essentially ONE reason why clients should consider Planning for Portability. It minimizes taxes while maintaining control over the ultimate disposition of the assets. The traditional estate planning structure does not do this!!!

The Traditional Model

On the first death, traditional estate planning will place all of the deceased spouses assets, up to the estate tax exemption amount, into a Credit Shelter Trust (what is sometimes called a Bypass Trust). The surviving spouse is generally given all of the income and principal distributions if necessary for his or her health, education, maintenance and support.

This trust preserves the estate tax exemption of the first spouse to die. No matter how large the trust grows it is not subject to estate tax on the death of the surviving spouse.

The structure has been used for years as a fundamental concept of estate tax planning. Always preserve the deceased spouse’s estate tax exemption.
The strategy worked very well when the estate tax exemption was only $600,000 as in the mid-90s. Even as the exemption was raised to $1 million in 2001 and continuing to $3,500,000 in 2009, the strategy was fundamental to estate tax savings.

However, in today’s estate tax environment, where each person receives a $5 million estate tax exemption, very few families will have estate tax issues. As I have been speaking to CPA’s, Enrolled Agents, and CFP’s and their professional associations, I have been explaining to them that the estate tax is only one of many taxes that proper planning investigates.

The income tax is now as important as the estate tax. Consider that the top estate tax rate is 35%. This is also the top tax rate for the income tax. In fact, saving income taxes may be more important than saving estate taxes once you factor in California’s 9.3% state income tax rate.

Minimize Taxes

One of the primary reasons for Portability Planning is to minimize income taxes on the second death. When the surviving spouse dies, all of the assets in his or her estate are “stepped-up” to fair market value but, not the assets in the Credit Shelter Trust.
When the beneficiaries acquire the assets from the Credit Shelter Trust, they typically sell them immediately. This usually creates a capital gain and taxes must be paid on the growth of those assets. Portability Planning allows beneficiaries to avoid paying the tax because they will get a step-up in basis on the property included in the surviving spouses estate.

Maintaining Control

The only way to get a step-up in basis is to have the assets included in the surviving spouse’s estate. Assets in the Credit Shelter Trust do not get basis. If you leave all of the assets to the surviving spouse, you get basis, but the surviving spouse can choose who gets the property when [he or] she dies. In other words, you have no control.
In our next post, we will blog about the proper use of portability planning, and how it is used to properly plan for clients.

If you have questions on whether portability planning is appropriate for you or not, please contact a qualified estate planning attorney.