In general, portability allows a surviving spouse whose husband or wife died after January 1, 2011 to use the Deceased Spouse’s Unused federal estate tax Exemption, otherwise known as DSUE. When one owns assets less than his or her lifetime exclusion amount and passes away first, portability has the potential to correct issues associated with unbalanced asset ownership between spouses and inefficient estate documents that leave all assets to the surviving spouse.
Top 10 Possibilities of Portability
1. Time is of the essence. To take Uncle Sam up on his offer, the decedent’s estate must make an election for portability on a timely-filed estate tax return.
2. Executor in charge. Electing portability is the responsibility of an executor.
3. Who makes the cut? DSUE can be used only by a citizen or permanent resident surviving spouse (not a non-resident alien), during his/her lifetime or at his/her death.
4. The ins and outs of portability. DSUE can be used during one’s lifetime and reported on Form 709 Gift Tax Return, or it can be used at death and reported on Form 706 Estate Tax Return.
5. “Lifetime gifting” – pass it down. Use DSUE to make lifetime gifts, especially if the surviving spouse remarries.
6. Continue to place trust in trusts. Portability is a valuable estate planning tool, but it does not negate the need for trusts to capture state estate tax exemptions and for asset protection.
7. Look before you leap! Planning considerations have shifted with changed tax rates. The traditional strategy of funding a family trust and a marital trust for the surviving spouse now demands more in-depth analysis.
8. All things considered… How and when to use portability should be evaluated on a case-by-case basis because estate plans are not one-size-fits-all.
a. A surviving spouse who has a DSUE amount should take this into account when negotiating a premarital agreement with a new spouse, and either obtain compensation for the DSUE amount that will be lost (since the new spouse impacts the amount to be ported) or have the new spouse create a lifetime credit shelter trust with assets comparable to the DSUE surrendered from the earlier spouse.
b. There must be an independent fiduciary (executor) who will elect what is in the best interest of the estate, as there may be inherent competing interests.
c. For some individuals, the portability election should be referenced in the estate plan. A provision directing the executor or trustee to elect portability of any unused exemption could be prudent, particularly if it is a second marriage and the children do not want their surviving step-parent to have the exemption or other situation where family tension is likely.
9. States have yet to follow in the footsteps of Uncle Sam. Portability is not applicable on the state level.
10. Should it stay or should it go now? It’s important to recognize that portability may not last forever.
For first-class assistance with estate and income tax planning, call McManus & Associates at 908-898-0100. To learn more about this award-winning firm, go to www.mcmanuslegal.com.
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