By FPA member, Mitchell Kaufman, CFP®
Last Updated: June 3, 2013
As you may already know, we each can now shelter up to $5.25 million ($10.5M for couples) from estate taxes as assets pass to our heirs. This figure for 2013 has become a permanent part of the tax code and will be indexed for inflation in subsequent years, thanks to the recently passed American Taxpayer Relief Act of 2012 (ATRA). What you may not know is the same act also made “portability” a permanent law, which in turn has prompted some to question the need of traditional trusts.
So what is “portability” and how does it affect you? The new portability law allows us to transfer our $5.25 (2013) exemptions to our surviving spouses. Previously, we could have only accomplished efficient use of both spouses’ exemption amounts by dividing asset ownership between the two spouses and establishing a credit shelter trust, or an A/B Living Trust, that would be activated after one spouse passes.
While portability appears to simplify the estate planning process and perhaps make trusts obsolete, there are a number of pitfalls you will need to watch out for:
- Remarriage: There is potential to lose a deceased spouse’s unused exemption amount when a more recent spouse passes away. One solution may suggest using the first spouse’s exemption via gift and then creating a credit shelter trust with the second spouse. It is always a good idea to review your estate plan with your attorney before getting remarried.
- Watch out for appreciated assets: The exemption amount transferred to your spouse under the new “portability” law remains fixed and is not indexed for inflation. More inflation protection could be available under the credit shelter trust.
- Tax filings: Portability will require the executor to file a return at the death of the first spouse.
- Generation Skipping Tax (GST) Exemption: The GST exemption is not portable. By contrast an A/B Living Trust could take advantage of the GST exemption amounts for potential transfers to grandchildren.
- Asset Protection/Prior Marriage: The credit shelter trust may provide asset protection and secure inheritances for children of prior marriages, and if properly drafted protect assets from the children’s creditors.
- Living Trust avoids Probate: Besides allowing post-mortem portability, a Living Trust avoids the cost, delays and public disclosure that probate entails.
While “portability” may be here to stay, there are still a number of traditional planning solutions you may want to review:
- Annual Gifts: You may want to continue to gift to those other than your spouse to take advantage of the $14,000 (2013) annual gift exclusion per donee. There are also exclusions for transfers for medical and education expenses. This is still a great way to gift assets and reduce your gross estate.
- As mentioned above the GST Exemption is not “portable” so you may want to consider gifting to lower generations to take advantage of the GST exemption amount now.
- Spousal Lifetime Access Trust (SLAT): Here one spouse makes a gift in trust and the Trustee has the right to make distributions to the other spouse. Thus the SLAT can be used to provide the other spouse with access to a potential cash flow (from cash values within the trust) while the insured (or insureds’) remains alive. For more details you can review my white paper on this topic.
Bottom line, keeping your estate current will help assure your assets end up in the hands of those you intend with the least erosion from taxes and legal fees. We typically recommend a review every 3-5 years or upon a life changing event such as marriage, divorce, or passing of a loved one.
This information is not considered a recommendation to buy or sell any investment or insurance. We strongly recommend an advanced tax and estate planning expert be contacted for further information.
FPA member Mitchell Kauffman, CFP®, MSFP, MBA, provides wealth management services to corporate executives, business owners, professionals, independent women, and the affluent. He is one of only five financial advisors from across the U.S. named to Research magazine’s prestigious Financial Advisor Hall of Fame in 2010, and among a select list of 100 over the past 20 years. For more information, visit www.kauffmanwealthservices.com or call (866) 467-8981. Kauffman Wealth Services is an independent Registered Investment Advisor in California. Securities offered through Raymond James Financial Services, Inc., member, FINRA/SIPC.