Implementing Portability Into Your Estate Planning

The estate tax has changed and will continue to evolve over time. The same goes for the estate planning tools available to clients. In 2010, Congress implemented an estate planning tool called a “portability election,” whereby a surviving spouse could use the deceased spouse’s unused estate tax exclusion. This allowed a couple that failed to plan for the estate tax with traditional trust-based planning to potentially have a second bite at the apple by filing an estate tax return and making the portability election to carry over the deceased spouse’s exemption amount.

A portability election allows the surviving spouse to carry over the deceased spouse’s exemption amount in the year the deceased spouse dies. If a spouse died in 2019 when the estate tax exemption amount was $11.4 million, for example, the surviving spouse could carry over the deceased spouse’s unused $11.4 million exemption. Why would a surviving spouse do this? Under current law, the estate tax is set to revert in 2026 to $5 million (adjusted to inflation, which is projected to be around $7 million). A couple with a net worth in the $5-$11 million range—i.e., clients that currently are not subject to estate taxation—should think about implementing portability as a part of their estate planning when considering the possible future growth of their portfolio.

Given the substantial increase in the estate tax exemption amount over the past few years, a number of clients in the $5-$11 million range have engaged in planning with either a probate avoidance trust, where everything passes to the surviving spouse, or a “disclaimer trust” plan, where the surviving spouse has the ability to disclaim assets within nine months of the death of the first spouse. Disclaimed assets in a disclaimer trust pass to an estate tax planning credit shelter trust (typically referred to as a Family Trust in our planning documents). Both of these options make sense, given the current estate tax exemption, but like any plan, they require review as circumstances change. Implementing a portability election, especially when combined with disclaimer trust planning, provides clients in this range with powerful flexibility.

While portability is a compelling estate planning tool, there are a few downsides. One is that it is predicated on the surviving spouse being the last spouse, and does not account for remarriage. If the surviving spouse remarries, the portability election can be jeopardized. Further, the portability election does not shield property from additional estate taxes on the appreciation of that property after the first spouse’s death. This is a disadvantage when compared to traditional trust-based plans implementing a fractional funding formula (where one-half of the trust passes to the credit shelter trust), which allow future appreciation to grow estate tax free in the credit shelter trust after the death of the first spouse.

For more than a decade, the portability election has been a powerful estate planning tool. But, like any tool, proper implementation is crucial. We are in an area of continued estate tax uncertainty. The next time you have a trust review, make sure to ask us whether portability might make sense for your estate planning.