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Planning with portability

If you're married and estate planning today, you could transfer everything to your spouse when you die, and your estate can elect to transfer your unused applicable exclusion amount to your surviving spouse. Your spouse will then have an applicable exclusion amount equal to the sum of his or her own basic exclusion amount and you run used applicable exclusion amount, which your spouse can use for gift or estate tax purposes. For example, if your estate transfers your $12,060,000 unused applicable exclusion to your surviving spouse, who also has an $12,060,000 basic exclusion amount, your spouse then has a $24,120,000 applicable exclusion amount to shelter property from gift and estate tax in 2022.

The portability provision would seem to make estate planning easier, and there maybe far less need to use AB trust arrangements. But there are a few potential pitfalls to watch out for.

  • If you are predeceased by more than one spouse, the unused applicable exclusion of an earlier spouse could be lost. That is because you use the unused applicable exclusion amount (if any) of your last deceased spouse. This may be another factor to consider when planning for remarriage.

  • The unused applicable exclusion amount that you transfer to your surviving spouse is not indexed for inflation after you die. If the property you transfer to your spouse appreciates after your death, the value of such property in your spouse's estate could exceed your unused applicable exclusion amount and could result in estate tax. With an A-B trust arrangement, appreciation on property in the B trust would be sheltered by your applicable exclusion amount.

  • Previously, the unused applicable exclusion election, an estate tax return needs to be filed even if estate tax is not owed.

In July 2022, the IRS issued Revenue Procedure 2022-32, it provides a simplified method for certain estates to obtain and extension of time to file a return on or before the 5th anniversary of the decedent’s death to elect portability of the Deceased Spousal Unused Exclusion (DSUE) amount. This Revenue Procedure applies to estates that are not normally required to file an estate tax return because the value of the gross estate and adjusted taxable gifts are under the filing threshold.

Using the applicable exclusion amount now

Even with portability, it may be useful to take advantage of the increased applicable exclusion amount by making gifts now that can reduce your taxable estate. Some reasons for using the

applicable exclusion amount now, verses upon death might include the following situations:

  • There are family members or individuals other than your spouse whom you would like to provide for during your lifetime. The applicable exclusion amount could be used to shelter gifts to such persons from gift tax. Also consider lifetime gifts that qualify for the annual gift tax exclusion, $16,000 in 2022, per donor, or as qualified transfers for medical or educational purposes. These gifts are not taxable and do not use up your applicable exclusion amount.

  • Tax laws can always change. In the future, the available applicable exclusion amount may be less, portability may not be available, and tax rates may be higher.

  • Appreciation on gifts you make is removed from your gross estate. For example, if you made a gift of $12,060,000 now and the property doubles in value to $24,120,000 in the future, the $12,060,000 of appreciation would be removed from your gross estate. Please realize the property will not receive a stepped-up basis at your death for income tax purposes.

  • If you would like to benefit your grandchildren and later generations, it may also be useful to use your $12,060,000 (in 2022, $11,700,000 in 2021) generation-skipping transfer (GST) tax exemption now. The GST tax exemption is not portable between spouses. Applicable exclusion amounts will often be used with generation-skipping transfers to protect the transfers from gift and estate tax.

  • State inheritance or estate taxes can be saved. Most states do not have a gift tax. Making a gift can remove the property from your estate for state death tax purposes. Also, state exclusion amounts may be different than the federal applicable exclusion amount and may not be portable between spouses. Consult a tax or estate planning professional familiar with the laws in your state.

For many of the same reasons discussed above, it might also be useful to have your estate use all of your applicable exclusion amount at your death rather than transfer the unused exclusion to your spouse. For example, it might make sense if there are persons other than your spouse whom you would like to benefit prior to the death of your spouse. In some cases, it may be useful to use A-B trust arrangements.

Estate plans and documents

Estate plans and documents written prior to the 2010 and 2012 tax acts may no longer carry out your intended wishes because of the portability provision or the increased basic exclusion amount. Your trusts and wills should be reviewed to see if they still meet your needs.

For example, if you have an estate of $12,060,000 and an A-B trust arrangement that would fund your credit shelter trust with the applicable exclusion amount, would you want your B trust to be funded with the full $12,060,000, with nothing passing to your spouse (other than whatever interests your spouse might have in the B trust)? Or might you want to transfer the $12,060,000 to your spouse, who would be able to use your applicable exclusion amount to protect the $12,060,000 from gift and estate tax? But what if the basic exclusion amount is reduced or portability is not available?

Your documents and plans may need to be revised to reflect the tax changes and any uncertainty for the future. Flexibility to deal with future changes is key.

Everyone's situation is unique, and the issues are complex. To help guide you through these opportunities and uncertain times, we can work with you and your estate attorney, or introduce you to one of several attorneys that we have worked with in providing the tailored legal documents needed to meet your overall financial planning needs.


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