As discussed in a prior post, one of the helpful provisions recently added to federal estate tax law allows a surviving spouse to use any “leftover” or “unused” federal estate tax exclusion amount of a deceased spouse. The federal estate tax exclusion amount will increase to $5.34 million for 2014 (to be adjusted for inflation in future years). If not used during the deceased spouse’s lifetime, the unused exclusion amount is “portable” and the surviving spouse can file a federal estate tax return to claim the deceased spouse’s “Deceased Spousal Unused Exclusion” amount.

Portability effectively allows married couples to pass up to $10.68 million to their heirs free from federal estate taxes with absolutely no planning at all. That said, it may not be wise to rely solely on portability for estate tax and marital deduction planning. There are other benefits to planning with trusts, including:

  • Although the $5.34 million estate tax exemption is portable, the GST exemption is not. Trust planning is necessary to avoid wasting any unused GST exemption amounts.
  • Electing portability requires the filing of an estate tax return. For some estates, this may be a complex determination.
  • If portability is elected, the statute of limitations on the deceased spouse’s estate remains open until the statute has run on the surviving spouse’s estate. If not elected, the statute of limitations would expire three years after filing of the first spouse’s estate tax return.
  • A credit shelter trust may provide certain asset protection benefits not otherwise available to a surviving spouse.
  • A credit shelter trust could help protect inheritance for children of the first spouse to die.
  • A credit shelter trust can help prevent the unforeseen and unintended use of the deceased spouse’s exclusion amount by a surviving spouse.

To reiterate the wisdom of another prior post, each estate planning document is unique to the particular client and it is difficult to generalize the benefits and detriments of the planning options now available. The best approach is for individuals to review the options with competent counsel.