This article describes the basic concepts of portability. Traditionally the most common planning for reducing Federal estate taxes was credit shelter planning. Credit shelter planning requires the clients to have separate trusts, one for each spouse, set up and funded before the death of the first spouse.


The Federal estate tax allows each spouse a certain amount that can be taxed tax free, in 2022 the amount is $12.06 million. However, previously the exempt amount was much smaller and only one very much smaller amount was obtainable, absent credit shelter trusts. While each person was entitled to a separate exempt amount, the family only got one such exempt amount absent employing a credit shelter trust setup. To do so, the family had to set up separate trusts before either one of the two spouses died. The  tax law passed effective starting in 2018 DOUBLED amounts that could be passed in an estate tax free, compared to pre 2018 amounts.


Portability was a new option that came in after 2010. Congress changed the tax law so that while credit shelter trusts were still the same viable planning option, the law was changed so that separate credit shelter trusts do not have to be set up in advance in order to get both spouse’s $12M exempt amounts.


What is the catch with portability? Well, “portability” involves essentially obtaining the equivalent of an “accounting credit” for the first spouse’s exempt amount (or remaining portion of it in some estates). Then the surviving spouse gets his or her own exempt amount plus the “accounting credit” amount. The catch is that to get the credit the IRS requires a portability 706 tax return be filed within 9 months of the date of death of the first spouse.


Besides the catch just mentioned, portability appears to suffer by comparison with credit shelter trusts in that capital appreciation (but not income) allows additional exempt amounts for credit shelter trusts but not portability setups. The capital appreciation referred to is after the death of the first spouse, up to the date of death of the second spouse to die. On the other hand, portability setups have a better advantage over credit shelter trusts with respect to basis step-up and income taxes. The significance of this issue of capital appreciation is disputed by some estate planners; with the argument that there are strategies to eliminate the problem while keeping the advantages of portability.  Portability formats have become extremely popular for estates with asset ranges of $5 to $20 million. Credit shelter trusts retain some advantages for estates above this level, but portability can be considered alternately by the client for those estates as well.


Keep in mind that what Congress giveth, it can taketh away.  The current amount that can be passed tax free is very generous, and Congress can at any time decide to reduce it.  It pays for families to forge flexible estate tax plans, that can be resistant to reductions in the credit shelter amounts by Congress.


Clients should keep in mind that the amounts sheltered from estate taxes made a very large jump from about $5.5M to $12M per person. This large jump substantially increases the possibility that a future congress will reduce the credit shelter amount (if political winds change). For this reason clients with estates lower than the amount currently taxed should NOT be complacent and ignore estate tax planning, and in particular should be sure to obtain the benefits of portability. This action should certainly be considered if the client’s estate is estimated to be $5M or more; moreover, estates sizes of between $3 and $5M might consider the same portability planning (in case Congress drastically reduces the amount that can be passed tax free).


If you desire information on how either portability or credit shelter strategies could impact your own estate planning, contact the law firm.