If You Can Elect Portability, Why Do Marital Estate Tax Planning?

Posted April 14, 2017

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You probably don’t have a federally taxable estate since you can give away $13.6 million (in 2024) tax free. And if you’re married, when you die, your spouse can elect to inherit your unused tax-free amount and be able to give away up more than $27 million tax free. This is known as “portability.”

Prior to the enactment of portability in 2012, married couples had to establish trusts in order to shelter funds and protect the estate of the first spouse who died from being taxed when the second spouse dies. These are often referred to as “QTIP” or “credit shelter” trusts. The question is, if you have less than $23 million dollars, is there any reason to partake in estate tax planning? Here are a few reasons to consider:

Your state may have a lower estate tax threshold and not permit portability. That is the case in Massachusetts, where I practice. Here the threshold is $2 million, so even if your estate value is much less than $13.6 million you may want to engage in tax planning to lower or eliminate the Massachusetts estate tax.
To protect growth. If you fund your trust with up to $13.6 million and the value of the trust assets grows, they will not be in your spouse’s estate. For example, if you and your spouse each have $13.6 million and your share of the estate grows by $1 million before she dies, if you leave it in trust, the extra $1 million will not be taxed upon your spouse’s death. But if he has $15 million it will be taxed even if he does elect portability. This benefit is more useful for people living in states with lower estate tax thresholds.
Creditor protection. Funds you leave your spouse in trust can be protected from her creditors.
Second marriage protection. Funds you leave in trust can stay in the family and not go to the new spouse or her family.
Dementia protection. Seniors in the United States increasingly are becoming targets of scams. If you name a co-trustee other than your spouse to the trust you leave for him, it will provide ample protection against his vulnerability to bad decisions and predators should cognitive decline develop.

Of course, most of these reasons to consider estate tax planning despite the availability of portability also are solid reasons to engage in estate planning and consider the use of trusts even if you do not have a taxable estate.

Portability Permits Doubling the Estate Tax Exemption for Surviving Spouses

What’s a QTIP Trust and Why Would You Want One? Here are 7 Reasons

Does Your State Have Estate or Inheritance Taxes?