Caplin & Drysdale for Caplin & Drysdale write: As part of the American Taxpayer Relief Act of 2012, Congress
made permanent the portability of estate tax exemption between
spouses. Although this change was supposed to be a simplification
for married couples, after a year of experience with it, we have
concluded that it is anything but simple!
Under portability, if the first spouse to die does not use up
all of his or her exemption from estate and gift tax, the executor
of the first spouse's estate may elect to give the use of the
remaining exemption to the surviving spouse. The surviving spouse
can then use that exemption amount (the deceased spousal unused
exemption amount, or DSUE) to make lifetime gifts or to shelter
bequests at death. This provides an alternative to the traditional
estate planning for wealthy married couples in which a credit
shelter trust, or bypass trust, is set up when the first spouse
dies in order to use up the deceased spouse's exemption. Now,
with the top marginal estate tax rate set at 40% and the top income
tax rate set at 39.6% (plus the 3.8% surtax in many cases), both
estate tax and income considerations must be taken into account in
planning. Drafting a flexible estate plan that allows circumstances
at death to be considered before making the choice between
portability and a credit shelter trust often will be the best
option.
Set forth below are some of the most significant pros and cons of these alternative planning techniques as they would apply to a hypothetical couple, Ozzie and Harriet. We'll assume for purposes of this discussion that Ozzie will be the first spouse to die.
Which plan is better in any particular case turns on an analysis of many factors including:
Set forth below are some of the most significant pros and cons of these alternative planning techniques as they would apply to a hypothetical couple, Ozzie and Harriet. We'll assume for purposes of this discussion that Ozzie will be the first spouse to die.
Credit Shelter Trust |
vs. |
Portability |
Assets put in a credit shelter trust for the benefit of Harriet
will appreciate outside of Harriet's taxable estate. |
vs. |
If portability is used, all of the couple's assets will pass
to Harriet, along with Ozzie's unused exemption, but
Ozzie's exemption, the DSUE amount, is not indexed for
inflation. |
Assets in the trust do not get a new (presumably higher) basis
when Harriet dies. |
vs. |
Assets are included in Harriet's estate and get a new basis
when Harriet dies. |
Ozzie's GST exemption can be applied to the credit shelter
trust. |
vs. |
Ozzie's GST exemption is wasted if he doesn't use it
during life, unless a QTIP trust is used in conjunction with
portability. |
Ozzie's exemption is used for the benefit of the intended
beneficiaries, with no possibility of loss through remarriage. |
vs. |
Harriet controls who gets the benefit of the DSUE amount. In
addition, if Harriet remarries and does not use the DSUE amount
before her new spouse dies, the DSUE amount received from Ozzie
will be lost because he will no longer be her "last deceased
spouse." |
In a state with an estate tax but an exemption lower than the
federal exemption (such as DC or Maryland), use of the full amount
of the federal exemption will require payment of a substantial
state estate tax. The state-law QTIP election in Maryland provides
an option to avoid this issue. |
vs. |
In a state with an estate tax but an exemption lower than the
federal exemption (such as Maryland or DC), complete reliance on
portability will lead to loss of the state estate tax
exemption. |
If Ozzie's estate is below the dollar threshold for filing,
no federal return needs to be filed. However, if the state has an
estate tax with a lower filing threshold, a pro forma federal
return may have to be prepared in any event. |
vs. |
Portability requires that Ozzie's estate file a federal
estate tax return even if the value of the estate is below the
filing threshold. |
A credit shelter trust provides some asset protection for
Harriet. |
vs. |
With portability, Harriet owns the assets, so there is no asset
protection. |
A credit shelter trust offers all of the advantages of trusts
(management of the assets in case of incompetency or lack of
interest, protection of the assets from undue influence, certainty
that the remaining assets will pass to the intended beneficiaries,
etc.) |
vs. |
Portability avoids the expense and inconvenience of a trust and
gives Harriet complete control over the assets. |
Which plan is better in any particular case turns on an analysis of many factors including:
- The overall value of the estate
- Anticipated increase in value of the assets
- Anticipated estate, income tax, and capital gains tax rates applicable to the estate, the spouse and the ultimate beneficiaries of the estate
- The rate of inflation
- The types of assets that are owned
- Age of the clients and the likely period of time between the two deaths
- Applicable state law
- Whether a surviving spouse is likely to remarry
- Whether the couple has children from prior marriages
- Whether it is important to be able to use the GST exemption
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