Some estate planners have suggested that portability makes it unnecessary to continue to draft estate plans that include bypass trusts. However, reports of the demise of the bypass trust seem to be greatly exaggerated, considering the uncertainty of portability and the many other advantages to the bypass trust.
One of the most heralded aspects of the 2010 estate tax law update is portability of the federal estate tax exemption between married persons. Some media “experts” have said that portability would eliminate the need for most estate planning. This is absolutely not true. As pointed out recently in the Journal of Financial Planning, bypass trusts, also known as credit shelter trusts, are still a savvy planning strategy, and should be used for many married people with considerable estates.
Portability means that any unused portion of a deceased spouse’s estate tax exemption doesn’t simply dissipate but can transfer to the surviving spouse. Each individual gets a $5 million exemption, which means a married couple can effectively protect up to $10 million of their assets from estate taxes with their combined exemptions. That amount is sufficient to protect the vast majority of estates. Or so it would seem.
There are two conditions that limit the effectiveness of portability. The first is obvious: portability will expire at the end of 2012, unless Congress acts to preserve it. The second is that the surviving spouse must file a timely estate tax return in order for the IRS to assess and transfer the unused exemption, even if the estate value wouldn’t have otherwise triggered an estate tax return. Portability, then, is not as simple, nor as automatic as many would like to believe.
Moreover, relying on portability alone, as a technique, lacks many estate planning advantages of the bypass trust, including but not limited to: remarriage protection; creditor and spendthrift protection; protection of the next generation’s inheritance especially in the cases of blended families; removal of appreciating assets from the surviving spouse’s estates; and disposition of taxable income to beneficiaries in lower brackets that could result in a net tax savings.
Lastly, remember that portability will sunset for people dying on or after January 1, 2013. Portability will be effective only in those situations in which both spouses die prior to that date. In most situations, a properly planned bypass trust will offer significant advantages over reliance on portability.
Reference: The Journal of Financial Planning (August 2011 ed.) “Why Portability Isn’t a Cure-All”