San Jose Estate Planning Attorney Blog

What is the proper way to plan for taking advantage of the deceased spouse’s portability exemption amount? I have written previously on portability planning here and here.

In traditional estate planning, the client will create an ABC trust where the A Trust is for the Alive Spouse, the B Trust is for the Buried Spouse, and the C Trust is the leftover amount of the deceased spouse’s remaining property not placed in the B Trust. The C Trust qualifies for the marital deduction so there is no estate tax owed on the first death.

As we have discussed previously, however, for many estates, there is no income tax benefit for using a traditional ABC Trust model in your planning.

Instead, we are recommending that client's consider having an ACB Trust instead. Technically, we want the trust to be drafted to allow for the making of a Clayton election.

Essentially, all of the deceased spouse's property is allocated to the C trust. Remember, the C Trust qualifies for the marital deduction so there is no estate tax owed on the first death. It also does not use up any of the deceased spouse's estate tax exemption. This allows for maximum usage of the estate tax exemption by the Surviving Spouse.

The trustee has 15 months from the first spouse's date of death to claim the marital deduction on a timely filed estate tax return. If the trustee claims the marital deduction, they will also elect portability of the deceased spouses exemption amount on the same return.

If the trustee does not claim the marital deduction on the estate tax return, then the property will be placed in the B trust. Some or all of the deceased spouse's estate tax exemption will be used. Whatever is not used is still available to be ported over to the surviving spouse.

Using this Clayton Election Strategy gives the surviving spouse maximum flexibility to determine what the best course of action is at the time the decisions matter. Trying to draft an estate plan in today's ever changing tax climate is like shooting at a moving target and hoping to hit the bullseye.

On the first death, the surviving spouse can take a survey of the assets owned, the tax law in place, and the economic conditions and assumptions going forward to create the best result for themselves and their families at that moment.

This is almost impossible to do today unless clients are going to change and revise their plans every time the law changes beneath them.

It is easy to find problems with something or to claim that it will not work. Previously, I blogged about the arguments that many attorneys are using against portability in an effort to avoid change.

It is much more difficult to champion something, to investigate, and to find a way to explain how something may be beneficial to a client.

There is essentially ONE reason why clients should consider Planning for Portability. It minimizes taxes while maintaining control over the ultimate disposition of the assets. The traditional estate planning structure does not do this!!!

The Traditional Model
On the first death, traditional estate planning will place all of the deceased spouses assets, up to the estate tax exemption amount, into a Credit Shelter Trust (what is sometimes called a Bypass Trust). The surviving spouse is generally given all of the income and principal distributions if necessary for his or her health, education, maintenance and support.

This trust preserves the estate tax exemption of the first spouse to die. No matter how large the trust grows it is not subject to estate tax on the death of the surviving spouse.

The structure has been used for years as a fundamental concept of estate tax planning. Always preserve the deceased spouse's estate tax exemption.
The strategy worked very well when the estate tax exemption was only $600,000 as in the mid-90s. Even as the exemption was raised to $1 million in 2001 and continuing to $3,500,000 in 2009, the strategy was fundamental to estate tax savings.

However, in today's estate tax environment, where each person receives a $5 million estate tax exemption, very few families will have estate tax issues. As I have been speaking to CPA's, Enrolled Agents, and CFP's and their professional associations, I have been explaining to them that the estate tax is only one of many taxes that proper planning investigates.

The income tax is now as important as the estate tax. Consider that the top estate tax rate is 35%. This is also the top tax rate for the income tax. In fact, saving income taxes may be more important than saving estate taxes once you factor in California's 9.3% state income tax rate.

Minimize Taxes
One of the primary reasons for Portability Planning is to minimize income taxes on the second death. When the surviving spouse dies, all of the assets in his or her estate are "stepped-up" to fair market value but, not the assets in the Credit Shelter Trust.
When the beneficiaries acquire the assets from the Credit Shelter Trust, they typically sell them immediately. This usually creates a capital gain and taxes must be paid on the growth of those assets. Portability Planning allows beneficiaries to avoid paying the tax because they will get a step-up in basis on the property included in the surviving spouses estate.

Maintaining Control
The only way to get a step-up in basis is to have the assets included in the surviving spouse's estate. Assets in the Credit Shelter Trust do not get basis. If you leave all of the assets to the surviving spouse, you get basis, but the surviving spouse can choose who gets the property when [he or] she dies. In other words, you have no control.
In our next post, we will blog about the proper use of portability planning, and how it is used to properly plan for clients.

If you have questions on whether portability planning is appropriate for you or not, please contact a qualified estate planning attorney.

6 ARGUMENTS AGAINST PLANNING FOR PORTABILITY

It seems like all I hear or read from other lawyers are all of the problems and uncertainties that exist in Portability Planning in the client's estate plan. Last week I listened to another attorney go on and on about the best course of action to take: "Keep Doing Things The Way We Have Always Done Them! Portability has problems!!!"

Living in the past is not usually the best solution for our clients. It is true that there are unknowns in Portability Planning. There are also some situations where it is not appropriate for that particular client. However, for most clients who have non-taxable estates, planning to use the deceased spouse portability exemption is the BEST planning available to them. At a minimum, it ought to be actively considered in the planning process.

Over the next couple of weeks, I will examine the potential problems of portability planning and the advantages and benefits as well.

Problems of Portability Planning

There are six primary arguments I hear attorney's make when they speak against planning for the surviving spouse to use Portability.

1. "It is only a two year law. Portability is only possible if the client dies in 2011 or 2012. Since that is not likely, why spend much time on it. Who knows what the law will be in 2013."

While it is certainly true that the law may change in 2013, not everyone will live to see that day. But we create estate plans to be in place when client's die. They need to be accurate and subject to the best information we have available at the time. It is not a good response to say, “I did not think you were going to die today?

2. "The law is ambiguous and there are no regulations and cases to help us interpret the law."

This one really upsets me because it is one of the reasons lawyers have such a bad reputation among the general public. Attorneys are generally perceived as being too conservative. In this case, however, the attorney, along with the rest of the client team of advisors, needs to weigh the risks and rewards of the strategy. As we will discuss in later posts, the benefits for some clients, clearly outweigh the risks.

3. "Use of the Portability Exemption is not automatic. It requires you to file an estate tax return."

True again. But at what cost? The cost of filing the return may be very small compared to the taxes lost for failing to tax advantage of Portability. In addition, there is the possibility the IRS will create a 706A short form as an alternative to the standard 706 Estate Tax Return currently required.

4. "There is no statute of limitations for examining the estate tax return."

There is also no statute of limitations if you don't file a return at all. However, if a return is filed, the IRS may only examine it after three years for a limited purpose and not to assess taxes. There are no limitations for an unfiled return."

5. "Although the surviving spouse estate tax exemption is indexed for inflation (also only for the next two years), there is no inflation adjustment for the deceased spouse Portability Exemption."

This is a risk to be considered in implementing Portability after the first spouse dies. It is not a reason not to plan. For many clients, this will not matter. It is good information to know, but it does not stop us from planning to use Portability.

6. "Portability only applies to Estate and Gift Taxes.. It does not apply to Generation Skipping Transfer Taxes."

Finally, an argument that makes sense! Therefore, if GST planning is important to the client, you should not use Portability as a planning option.

In our next post, we will discuss the many positive benefits for Portability Planning for clients.

Liz Chamberlin, Principal of Leland High School in the Almaden Valley is the years top principal according to the National Forensics League (Speech & Debate).

I am proud to say that I was a member of the Speech & Debate team at Leland when I was in high school. (I even won a couple of awards).  At that time, we had about 20 kids competing in various events.  My best friend in high school, Dennis Galvan, went to Nationals.  He is now an International Relations Associate Professor at the University of Oregon. 

Today the program has almost 400 members.  It is the largest team in the nation.  Much of the success of the Speech and Debate team goes to Gay Brasher.  She is a member of the National Forensics League Hall of Fame, and taught at Leland for over 40 years.  Even though she is currently retired, she continues to devote her time to helping high schoolers learn the art of speaking in public.

Many of you have seen me speak in public at our Boot Camp or at a lunch or dinner for your professional organization.  As a lawyer, I am often called to represent clients in court.  Speaking skills are an essential part of my work.

I can honestly say that most of the speaking skills I have are learned from Gay Brasher.  Many days, after school, she would work with us on our techniques, hand placement, vocal intonation, etc.  And there are thousands of others who can say the same.

This is my Thank You to her.  For her efforts to make me a better speaker.

However, she could not do it alone.  While we only had Mrs. Brasher to work with.  Today, there is a team of volunteers who help.  But there are also many others without whose support the Speech & Debate program would not exist. It is nice that the National Forensics League is recognizing that and making Liz Chamberlin their first Principal of the Year.