Greenville Estate Attorney: “The Estate Tax Exemption to Become Portable?”
January 27, 2010
Lately I have found myself fascinated by the recent repeal of the federal estate tax and all of its consequences, intended or otherwise. Equally fascinating are the proposals that have been made by members of Congress to reinstate the estate tax.
One such proposal is to ressurect the estate tax for 2010 at 2009 levels, and to make the federal estate tax exemption portable between spouses. This is an interesting proposal in that theoretically this would eliminate the need for a credit shelter trust to accomplish estate tax planning for a married couple. In a typical planning scenario, the credit shelter trust is funded by assets owned by the first-to-die spouse and is funded up to the exemption amount, and all other assets are placed into a qualified terminable interest property (QTIP) trust for the sole benefit of the surviving spouse. This is done because if all the assets of the first-to-die spouse are transferred to the surviving spouse, the first-to-die spouse’s exemption amount is totally wasted, and a much larger estate tax becomes due at the end of the surviving spouse’s lifetime.
The portability of the exemption would allow whatever exemption amount that is unused in the first-to-die spouse’s estate to be transferred to the surviving spouse’s estate. Wouldn’t that be great? The proponents of portability say that this would eliminate the need for the credit shelter trust, thus reducing complexity and the financial burden of estate planning. Good intentions of course, but where again does that road paved with good intentions lead?
Experienced estate planners can instantly recognize the complexities that exemption portability would create. Number one, what about multiple marriages? Suppose Jack dies married to Jane. Jane gets all the exemption amount from Jack. Jane then marries John. John survives Jane. Does John get all of Jane’s exemption amount, even what she had gotten from Jack? What if Jane had survived John? Does she get the benefit of John’s exemption and Jack’s exemption. I think it would be an interesting experience to dig through the Treasury Regulations pertinent to all of the varied situations that could be foreseen in this society of multiple marriages.
Another issue is state estate tax decoupling. Decoupling means that certain states have “decoupled” their estate tax regimes from that of the federal regime, resulting in state estate tax exemptions that are different from the federal exemption. States will not necessarily follow along with estate tax exemption portability, meaning that reliance on federal portability alone could result in significant state estate taxes payable. We can see how the stated goal of reducing complexity may be more difficult to achieve than first thought.
Another issue is that the credit shelter trust is not only useful for estate tax planning, it is also useful for protection of beneficiaries. Any person can be a beneficiary of a credit shelter trust, unlike a QTIP trust where the only beneficiary is the surviving spouse. Some people decide that they do not want certain people to receive an inheritance outright, but want to keep the inheritance in a trust for a period of time. Keeping these assets in trust protects these beneficiaries from their current creditors, future creditors, and protects the assets from equitable division in the event of a divorce. The credit shelter trust provides these asset protection benefits in addition to the estate tax benefits.
While the benefit of the credit shelter trust includes estate tax minimization, there are other benefits as well, and the idea that estate tax exemption portability will result in fewer trusts and less complicated estate plans is probably not going to be correct. There are many motivations that go into estate planning, of which estate tax minimization is but one. If you have estate planning needs, you should recognize that there can be many motivations and situations that need to be considered, some that you may not have even realized. A good estate planning attorney can help you flesh out these ideas, and get you closer to putting into place an effective estate plan that protects your assets and your beneficiaries.