Portability Revisited

With the “permanent” changes in the estate tax laws from about 2 years ago, we now have a permanent provision called portability.  This allows for the unused portion of someone’s estate to be “ported” over to the surviving spouse to be used on their final estate tax return.

Example: John Bean passes away worth $1 million in 2014.  The lifetime exclusion amount is $5.34 million.  The unused $4.34 million is “ported” over to Jane Bean who can be worth $9.68 million (if she died in 2014) and not owe any estate taxes.

In order to elect portability, the executor must file an estate tax return even if no estate tax is due.  This can result in some administrative costs, and in many cases, it is worth making the portability election (especially if the estate is under $5.34 million).

The assumption is that portability is better than placing assets into a “credit shelter” trust for the benefit of the surviving spouse.  In many cases, this assumption is incorrect.  The amount ported over to the surviving spouse does not increase with inflation.  Therefore, the longer that the surviving spouses lives past the first spouse, the greater the income and estate tax savings from using a credit shelter trust.

Example: John & Jane Bean are worth $10.680 million when John passes away in 2014.  The executor can either set up a $5.34 million credit shelter trust for Jane or elect portability and pass a full exemption onto Jane.  We will assume that Jane passes away 10 years later, the estate tax is at 40% and the capital gains tax is at 23.8% with no state income or estate taxes.  We will assume a 2% inflation rate and a 5% rate of return on the assets.  After 10 years, if all of assets are liquidated and capital gains taxes are paid, by using a credit shelter trust, the final estate will have an extra $542,700 of value versus electing portability.  This is primarily due to the rate of return on assets values being higher (5%) than the rate of inflation (2%).

If farmers combined estate is currently over $10 million which in many states is less than 1,000 acres of good farmland, then it is very important to interact with advisors that understand the benefits of using a credit shelter trust versus simply assuming portability is the best option.

If anybody is interested in a more detailed analysis of these options, please fill out the comment box below and I will send you the information:

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