T&E for Advisors: Portability as an Estate Planning Strategy
Welcome to Talking T&E for Advisors, where Trusts & Estates Editor in Chief Susan Lipp and Jamie Hopkins, chief wealth officer at Bryn Mawr Trust, take seemingly complex estate planning issues and break them down for financial advisors.
In this video, they discuss portability.
Questions:
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What is the concept of portability?
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What are some of its limitations?
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When can a surviving spouse elect to use portability, and how do they make this election?
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What are some factors advisors should consider when determining whether to recommend that a client elect portability?
Read the full raw transcript below:
Hello, I’m Susan Lipp, editor and chief of Trusts & Estates, and I’m speaking with Jamie Hopkins, the CEO of Bryn Mawr Trust Advisors LLC and chief wealth officer of Bryn Mawr Trust. And today we’ll be discussing the estate planning tool of portability, which is the ability of a surviving spouse to use the unused estate tax exemption of a deceased spouse. Portability can present complex issues, some of which were discussed in the article Pondering Portability in the June issue of Trusts & Estates and Jamie will help explain some of these issues today.
Q: So let’s get started with Jamie. Can you just briefly explain the concept of portability?
Absolutely. And it’s always a good place to start when we hear these terms that you probably generally understand what portable means, the ability to move it around. And this was one of the biggest changes really in estate planning over about the last 20 years.
At its core, and you kind of mentioned it, portability allows a surviving spouse to essentially inherit the unused federal estate tax exemption amount that was unused of the deceased spouse who passed away. Before portability, right, it was really a use it or lose it system, meaning that if the first spouse didn’t use up their whole exemption through planning and shelter trusts and giving things away, it was gone.
And when this rule changed though, it was interesting because it one made kind of a really good value proposition for people that we could keep this large exemption amount for both spouses. But at the same time, it actually kind of made estate planning less important in most people’s minds because they had all this flexibility and optionality. And that has led to what I would say is a downturn in the number of people getting their estate plans in order and doing proper planning. So one spouse dies can leave the portion of their unused federal estate tax exemption to their surviving spouse.
Q: What are some of the limitations of portability?
Yeah, so it’s a great planning tool, but it is not a replacement for traditional estate planning. We still need to do estate planning even with portability. A couple of the quick limitations. So the first part is that this is only for the unused estate tax exemption portion. It does not cover the GST, the generation skipping transfer tax exemption amount. And so that’s when we’re thinking about leaving things directly to grandchildren or great grandchildren. There’s a different rule that applies there. We have no portability of that exemption amount.
So, if we’re thinking about ultra high net worth individuals over $50 million net worth trying to create multiple generation transfers, we do have to do that while we’re still alive. The second limitation here is that this is a federal rule and that there are still states with their own estate tax rules in place. Portability does not mirror across the board the state rules around this. I believe the article said there’s only a couple I think it’s Hawaii, Maryland that really mirror identically whereas we have a handful of other states that have different rules and so you could be you you could be able to do portability for the federal but still owe the state estate taxes in place if you don’t do this ahead of time. So not a perfect system with both state and federal rules being a little bit out of sync here.
Q: So getting into some of the details, when exactly can a surviving spouse elect to use portability and how do they go about making that election?
Yeah. So one of the challenges around this is the whole decision around portability actually occurs after the first spouse dies. So in some ways it’s kind of when planning hasn’t been done properly, this comes into place. My general opinion is most situations if we set up the estate well ahead of time, we’re probably not using portability all that much. There are still situations in which you would, but usually it’s almost because we didn’t get everything done in time.
Then on the form 706, our federal estate tax return form, we actually elect portability on that form. It must be filed timely, complete, properly prepared, and submitted into the IRS to qualify. If we don’t file the 706 form, because we’re thinking, well, this the first spouse to die only had $3 million worth of stuff. We don’t need it. Don’t worry about it. Portability then would not occur and this would not transfer to the surviving spouse because it does not happen automatically.
So, it’s very important for every advisor, anyone working with an estate, even if there’s probably no estate tax due, that form 706 is still properly filed on time to preserve the portability of the unused exemption amount. So, that is a mistake that people do make just thinking it’s automatic because we didn’t have to use it all up. It will continue to the surviving spouse. It is something we need to let the IRS know essentially, hey, we’re continuing this on for the next spouse, right?
Q: So, as an advisor, what are some factors you should be discussing with your client that they should consider when deciding whether to elect portability?
Yeah. So, it really boils down to me two or three things here. The first one is if we are doing good planning ahead of time, we’re less likely to be using portability. We should be using up the exemption amount at that time in most situations versus hoping for some future time period in which we might use it. The reason is we don’t know how the future rules will play out that in the future we could see a big cut back in the lifetime exemption amount including portable ones and then all of a sudden in today’s world we have a very high exemption amount. My view is you use it up when you have it. You don’t wait for the future for something else to change. So, good planning, use it up ahead of time.
The second one is, you know, look at other planning strategies out there. Portability is a tool, an option, but it’s not the whole strategy. So, should we be using shelter credit exclusion shelter trust, which we’ve talked about in other videos. There’s been some great articles the last couple months in the journal, too. So, maybe look at some of those. Do we have blended families? Is there complexity? Does somebody use up more of their exemption amount than we realized earlier on in their life? I’ve seen that mistake occur too where people don’t think about the transfers that have occurred, think they’re getting all the portability, but it’s already been used up at some point.
And then the last one is form 706 does take time, money, money, and energy and planning. And sometimes when people pass away, it’s not the first thing on their mind is what forms do we need to go file relatively soon. So, I think all those are important factors here. It does create flexibility, but sometimes I think for clients it says, well, we don’t have to worry about it. We can deal with that, you know, in the future versus getting the right planning done today.
Closing:
All right. Well, thank you. I like that emphasis on the good planning beforehand so you’re sort of not left, you know, sort of scrambling at the end deciding about the use of portability, although it is a good tool to to think about. So thanks again for your insights, Jamie.
Thank you, too.
