Portability elections may not be the best for all families.
The federal estate and gift tax exemption is necessary for those with high net worth.
Any amount over this threshold is subject to estate taxes.
The “unified” exemption is $12.92 million per taxpayer for 2023.
Individuals and couples can work with an experienced estate planning attorney to reduce their tax liability.
One option available to couples is a “portability” election.
According to a recent Wealth Management article titled “Portability and Second Marriages,“ electing portability might not always be the best option for couples.
Couples should discuss with their estate planning attorney whether it makes sense in their situation for them to grant an executor the right to elect portability.
The couple will also need to decide who will serve as executor and how to allocate the estate tax burden.
What are possible problems with electing portability?
Unanticipated issues can occur with blended families.
The portability election for the Deceased Spouse’s Unused Exemption (DSUE) allows the exemption to be used personally by the surviving spouse.
This means it does not have to be used to benefit the heirs of the first decedent spouse.
One protection is to ensure the executor is not also a beneficiary because the Treasury stipulates only an executor can make these elections when a last will and testament is valid.
Consider this other scenario.
The child of the decedent spouse is the executor.
Because the estate was too small to require the filing of an estate tax return, the adult child chose not to spend the money to file a Form 706 Federal Estate Tax return so the second spouse could elect portability.
Although the family could argue about paying for a tax return for portability, it is better to include in the estate tax plan whether a tax return should be filed for these purposes and who is responsible for the cost of filing the return.
Clear communication is as beneficial in estate planning as it is in life.
Let us consider another possible issue with portability and blended families.
Blended families often have complicated structures with children from one or more prior marriages.
Sometimes, these families incorporate a Qualified Terminable Interest Property (QTIP) trust for the surviving spouse.
Eventually, the assets in the trust will be distributed to the descendants of the grantor (i.e., the first decedent spouse).
Electing portability can cause issues with the functioning of the QTIP trust.
Consider this scenario as an example.
A man and woman marry and have three children.
The woman dies.
The man then remarries.
He creates a QTIP trust to provide for this second wife and grants his children the remainder.
Because the second wife could elect portability, she uses it for her assets and distributes her estate to her children.
An estate tax is owed and paid by the QTIP trust.
The trust is drained, and the three children of the man are left with nothing.
What if the wife does not make gifts to her children?
If she has a large estate, it may require all of her exclusion amount and the DSUE.
In this case, the QTIP trust would be required to pay the estate tax for its own portion unless the estate plan waived reimbursement from the trust.
In this case, the trust could be drained by bearing most or all of the estate tax burden while the personal assets of the spouse are shielded.
For complex blended families, it can be wise to use traditional marital deduction and credit shelter planning.
If a DSUE is available, the estate plan should outline its use and relationship to a QTIP trust.
Portability elections for blended families should be done with the guidance of an experienced estate planning attorney.
Attempting to do such planning alone could leave unintended consequences for your heirs.
Reference: Wealth Management (June 21, 2023) “Portability and Second Marriages“