How Does Portability Affect My Estate Plan?

In light of Congress’s recent adoption of “portability” of the federal tax exemption between spouses, big changes are underway and already established. If you preparing to draft an estate plan, be sure you have a good understanding of portability and how it affects your future. At the very least, work with an estate planning attorney who can make sense of it for you.

Filing of Form 706

Portability is not automatically granted to surviving spouses. In order to obtain portability, an election must be made on a timely filed federal estate tax return for the spouse that passed away. This is extremely important because once the opportunity to make this election has passed, there is no way to claim portability for the surviving spouse. Action must be taken as soon as possible.

Even if the marital estate is not very large, and thus unlikely that the surviving spouse would need to use any of the other spouse’s exemption, it is still a good idea to file Form 706. At the very least, filing Form 706 will preserve the option in case some unexpected events occur in the future, such as a windfall inheritance or money gained through remarriage.

IRS regulations require that an executor or administrator appointed to an estate must be the one to file a Form 706, not the surviving spouse. It is advisable to create instructions in a will or trust for the executor or trustee to file a Form 706 to make sure this is not forgotten.

Consider Revoking Your Old A/B Trust

If you created an A/B trust to avoid tax consequences before the IRS granted portability between spouses, it is probably a good idea to revoke that trust and create a new, standard living trust. A/B trusts have many disadvantages that are no longer worth the hassle now that spouses can simply transfer their unused exemptions to each other. The disadvantages you can now avoid include:

  • Access limitations: A/B trusts create limitations on the surviving spouse’s access to the principal of the deceased spouse’s share of the estate.
  • Additional cost: In order to administer an A/B trust, a lawyer or accountant needs to sort out the couple’s estate when one of the spouses passes away. This requires professional expertise in order to make sure undesired tax consequences are not triggered. If you do not work with a competitively-priced attorney, you could be paying high costs here.
  • More paperwork: An A/B trust requires its own tax I.D. and tax returns to be filed annually. Additionally, the surviving spouse must keep separate records for the trust property.
  • Second step-up in basis: Depending on how the assets are divided in an A/B/ trust, the beneficiaries may not receive the advantage of the second step-up in basis for capital gains tax on the assets. Upon the sale of the assets, this can be costly for the beneficiaries.

On the other hand, there are some special circumstances that makes it advisable to have an A/B trust, such as protecting your children’s inheritance in the event your spouse has a subsequent marriage, or not being legally married.

If you would like more information on how portability might affect your estate planning needs, contact Hannah Sargent, Alameda County probate, trusts, and estate planning attorney. As a former military officer, she understand the importance of being thorough, informed, and professional, and she is willing to go the extra mile for her clients and their families. Call our firm at (510) 344-2599 today and schedule your free initial consultation.