Estate Administration by the Use of the New Federal Tax Portability Option

By:  Fredrick P. Niemann, Esq., a New Jersey Estate Planning Attorney

This is the 2nd part of a three part series on credit shelter trusts and the new federal estate tax portability laws.

Portability vs. Credit Trust Costs

Portability may actually increase the cost of administration by requiring the filing of an estate tax return that otherwise would not be necessary.  For example, assume that a husband dies in 2011 or 2012 with an estate of $3 million, all of which he leaves to his wife, who has an estate of $3 million.  No estate tax return is required because the husband’s estate is less than his applicable exclusion.  In order for the wife to make use of the husband’s DSEUA, a timely estate tax return must be filed with the appropriate irrevocable election.  The cost of preparing an otherwise unnecessary estate tax return could easily equal or exceed the cost savings of not including a credit trust in the husband’s estate plan.  Moreover, complexity is actually increased because the client must not only file an otherwise unnecessary estate tax return but that return must be filed timely and must contain the appropriate election.

Reliance on portability in lieu of the use of credit shelter trusts creates several other problems as well.  Although the 2010 Tax Act provides that the $5 million applicable exclusion amount is subject to an inflation adjustment, that adjustment ceases to apply once the taxpayer dies.  Unlike a credit trust that shelters post-death appreciation in value, the amount of the DSUEA is fixed as of the date of the pre-deceased spouse’s assets.

If for example, the husband who dies in 2011 with an estate of $3 million, all of which is left to a window with a separate estate of her own of $3 million, assume that the husband’s assets appreciate in value to $3 million and the widow dies on December 31, 2015.  Had the husband left his estate in a credit shelter trust, the entire appreciated value of the assets would have been excluded from the widow’s taxable estate, as well as having been exempt from the generation-skipping transfer tax.  Because the parties relied on portability, the husband’s exemption is fixed at $5 million.

In our next post we will look at the subject of portability as it applies to blended families.

For more information, please contact Fredrick P. Niemann, Esq. toll free at (888) 800-7442 or e-mail him at fniemann@hnlawfirm.com/.

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