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 3rd part of a three part series on credit shelter trust and the new federal estate tax portability.

Blended Family Estates

Reliance on portability may also defeat, either intentionally or unintentionally, the testamentary plan of the pre-deceased spouse.  It is common today for one or both spouses to have children from prior marriages.  There is no assurance that a surviving spouse who inherits outright the estate of his or her pre-deceased spouse will leave that property to the pre-deceased spouse’s children.  It is equally common for a surviving spouse to remarry.  If such a remarriage ends in divorce, it is possible that some or all of the inherited assets may be subject to division by the family law court.  If the marriage is successful, it is equally possible that the surviving spouse will leave his or her new spouse some or all of the assets inherited from the pre-deceased spouse.

Tax Considerations

A credit trust is a potentially more tax efficient vehicle than reliance on portability.  A property drafted credit trust can be used to sprinkle taxable income to beneficiaries in lower tax brackets, which cannot occur when property is left outright to the surviving spouse without such distributions being treated as taxable gifts.  If portability is relied upon and the pre-deceased spouse leaves his or her surviving spouse to children during his lifetime will constitute taxable gifts to the extent they exceed the surviving spouse’s annual exclusion.

Lastly, planners should keep in mind that portability will sunset for people dying on or after January 1, 2013.  Planners relying on portability are limited to factual situations in which both spouses die prior to that date.  In most situations, it appears estate plans that use credit trusts are far more practical and far less dangerous than reliance on portability.

For more information on credit shelter trusts and the new federal estate tax portability, please contact Fredrick P. Niemann, Esq. toll-free at (888) 800-7442 or email him at fniemann@hnlawfirm.com/.

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