Tiffany McKenzie sat on a panel entitled Owning Your Future: Hot Business Opportunities for the National Black MBA Association Conference in Atlanta, Georgia on June 8, 2019.
For years, estate planning practitioners have encouraged Congress to pass a bill authorizing portability of a married couple’s estate tax exemption (allowing a surviving spouse’s estate to add her deceased spouse’s unused estate tax exemption to her own). Now, with the passage of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “2010 Act”), estate planning practitioners are now wondering if, instead of being grateful that Congress finally listened, they should be thinking “be careful what you wish for.” Here is our take on the good, the bad and the ugly of portability.
Prior to the passage of the 2010 Act, every individual was entitled to her own separate estate tax exemption. If an individual died without enough assets to fully use her estate tax exemption, her remaining exemption would be wasted. With the passage of the 2010 Act, we now have portability of a married couple’s estate tax exemption. This means that a surviving spouse’s estate tax exemption would be the total of her estate tax exemption and her predeceased spouse’s unused estate tax exemption. This is a good outcome for married couples who, for whatever reason, don’t do the advance planning to split their wealth in a way that uses both of their estate tax exemptions at their respective deaths.
While the enactment of portability sounds like a great way for clients to reduce the amount of planning they have to do, the 2010 Act has several down-sides that make it risky for clients to rely on portability.
1. The 2010 Act is scheduled to expire in 2012, therefore, until a permanent bill is passed, it is uncertain whether portability will apply if both spouses do not die before the end of 2012.
2. A surviving spouse is only able to add his or her most recent predeceased spouse’s unused estate tax exemption to her own estate tax exemption. She cannot continue to accumulate each deceased spouse’s unused exemption or choose which deceased spouse’s unused exemption to use. This could make a widow think twice about remarrying.
3. There is no portability of the exemption from generation-skipping transfer tax. If clients rely on portability for estate planning purposes, they may waste a spouse’s GST exemption.
Perhaps the ugliest result of the inclusion of portability in the 2010 Act is the effect portability will have on the estate tax return of the predeceased poor spouse.
1. In order for a surviving spouse to rely on portability, an election must be made on the predeceased spouse’s estate tax return. Previously, if the value of a decedent’s estate was less than the estate tax exemption amount, no estate tax return needed to be filed. Now, however, it is going to be advisable for every estate to file an estate tax return, to preserve the surviving spouse’s ability to use the decedent’s unused estate tax exemption, resulting in the filing of many more estate tax returns, which will result in higher legal fees for clients, and a bigger job for the IRS in reviewing the returns.
2. In addition, while the normal statute of limitations for the IRS to impose a tax on a decedent’s estate is three years after the filing of the estate tax return, if a portability election is made on the estate tax return, the IRS will be able to review the deceased spouse’s estate tax return, and impose a tax on that return, until three years after the filing of the survivor’s estate tax return. Depending on the circumstances, the trustees may decide to delay making distributions to the beneficiaries of the trust until the end of the extended statute of limitations.