Scott J. Snyder, JD, CFP®, CFA, CIMA®

Much has been written about the estate tax law changes that provide higher exemption amounts and portability. For most people, estate planning has been greatly simplified, but in several situations, planning issues remain.
Current law imposes estate tax on wealth transfer exceeding a person’s “exemption amount.” Portability allows a widowed spouse access to any unused exemption amount belonging to their deceased spouse. If a widow(er) remarries, however, this exemption is lost. So, if Charles and Diana are married and Diana dies, she can leave $5.34 million dollars free of estate tax. Any unused exemption would be available for Charles to shelter gifts he makes during his lifetime or at his death. If Charles later meets Camilla and is thinking of remarriage, he might not realize the significant planning opportunity. Tax law limits portability to his most recent spouse. Upon his marriage to Camilla, Charles will forfeit access to Diana’s unused exemption. If Charles has a large estate ($5-6 million), he should strongly consider gifting property before the wedding.

Portability requires the first spouse to die to make an election by using IRS form 706. Historically, few estates filed a 706 because it is time-consuming and expensive. Consider a second marriage where the couple keeps their finances separate, and plans for their respective children to inherit their wealth. In situations where one, but not both, of the spouses is wealthy, the portability election is tremendously valuable to the wealthy side, but has no value and is only an expensive nuisance to the other side. When the less-wealthy spouse dies first, the challenge becomes convincing the estate to make the portability election even though it only the benefits the other family.

In second marriages, spouses often use QTIP (Qualified Terminable Interest Property) trusts to transfer assets. In our example, assume when Camilla dies, she leaves $5 million in a trust to benefit Charles so long as he lives. At his death, the assets go to her children. This QTIP trust triggers no tax at Camilla’s death because it qualifies as a marital gift. Later, when Charles dies, assume he has $10 million to transfer to his children. He can shelter $5.34 million using his exemption amount. Remember, Camilla’s exemption is still available to shelter up to another $5.34 million. The question is whether to allocate her exemption to shelter the $5 million transfer to her family or to Charles’ family. Tax law actually gives Charles’ executor the power to allocate Camilla’s exemption. With a forty percent estate tax rate, this can become a $2 million dollar debate.

These are just three planning issues that remain under the changed law. Things are certainly better, but not perfect. You still need to consult with your estate planning attorney.

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