Estate Planning with Portability Part III

In Part I of this Estate Planning for Portability series we were introduced to the concepts of the Unlimited Marital Deduction and the Federal Estate Tax Exemption amount (which we refer to as a coupon). We also introduced the couple Bob and Sara and their children Jake and Desiree. Through Bob and Sara we showed how a $400,000 estate tax was created through lack of planning. In Part II we examined traditional methods of estate planning in helping Jake and Desiree avoid this $400,000 disinheritance. We also introduced the concept of portability, and how it may be used as an alternative form of estate tax planning. We’ll now examine the pros and cons of traditional and portability estate planning approaches.

If you recall, portability does away with the requirement that a trust be formed at the death of the first spouse in order to capture the deceased spouse’s Federal Estate Tax coupon. Portability makes the coupon portable/transferrable to the surviving spouse. Congress saw this as an advantage for people avoiding having to do “complex” estate planning.

Another advantage to planning with portability has to do with favorable income tax treatment on the sale of inherited assets. This is the concept of double step up in basis. If you recall from our example of traditional estate planning for Bob and Sara, on Bob’s death his the assets transferred in trust for Sara’s benefit. At his death, his assets received a step up in basis to their value as of Bob’s date of death. On Sara’s death, her assets also receive a step up in basis to their value as of Sara’s date of death. So, when Jake and Desiree received their inheritance, assets received from Sara had a cost basis as of Sara’s date of death, and assets received from Bob’s trust had a cost basis as of Bob’s date of death. Assuming Bob’s assets appreciated in value in the time between his death and Sara’s, when Jake and Desiree go to sell the assets inherited from Bob’s trust, they’re subject to a greater capital gains tax than if the assets were to have been owned by Sara.

With portability, Sara would have inheritied Bob’s assets and received a step up in basis to Bob’s date of death, and since the assets are in Sara’s estate, at her death those assets would receive a second step-up in basis to Sara’s date of death. Thus the double step up in basis. Again, assuming the assets appreciated after Bob’s death, Jake and Desiree have a more favorable cost basis when they go to sell the assets.

By now, portability should sound pretty good – no need to employ trusts to avoid estate taxes, and better income tax treatment when the next generation inherits. There are of course some drawbacks. For one, trusts aren’t only good for estate tax planning. Most notably they can avoid the probate process in an estate settlement. Also, often times trusts are needed to address a given family situation, as examples – where there is fear of divorce, or high probability of law suit, or in cases of blended families or families with minor children, just to name a few.

Also, in order to port one’s coupon to their surviving spouse, the estate must file an IRS Form 706, also known as a death tax return. Not only is this an additional expense, but one of the requirements of the 706 is to identify and value every asset owned by the deceased spouse. For some people, keeping the government out of their affairs is a primary goal, that is defeated with portability.

Whether to use the traditional route or portability to accomplish your estate planning goals is best determined by working with an attorney experienced in estate planning. If you’d like to learn more or to speak with an estate planning attorney about your situation, contact Brady Cobin Law Group, PLLC your Raleigh Estate Planning Attorney for an initial consult – (919) 825-1518.