Portability, Marital Wealth Transfers, and the Taxable Unit

Abstract

Prior to 2011, the most efficient estate tax planning for married couples required a minimal level of asset equalization. In order to take maximum advantage of all existing wealth transfer tax exemptions and credits, each spouse needed to own, in an estate tax sense, enough assets to be able to fully utilize the estate tax credit or applicable exemption. This changed with the enactment of estate tax portability in the Economic Growth and Economic Recovery and Relief Act of 2011, which became permanent under the American Taxpayer Relief Act of 2012. “Portability” refers to the ability of a surviving spouse to make full use of his or her predeceased spouse’s unused exemption from estate tax. In an era of portability, if the less-wealthy member of a married couple dies first, he or she no longer “wastes” that exemption. It simply “ports” — or carries over — to the survivor. At first glance, portability appears to implicate theoretical concerns, as it functions as a modern-day coverture that “merges” spouses into one unit. Furthermore, portability discourages some lifetime transfers of property to the less-wealthy spouse, who is more likely to be female. On the other hand, portability simplifies tax planning and benefits both spouses in a marriage. Portability was envisioned as a congressional “kiss” to a loving couple who sees itself as a unit. Yet the tax benefit is available regardless of whether the couple does in fact function as an economic unit, raising tax policy questions about the appropriateness of using the married couple as the primary tax unit. On balance, however, portability is a salutary addition to the law of wealth transfer taxation that minimizes complexity in estate planning and likely reduces the use of certain QTIP trusts, which minimize the autonomy of the surviving spouse, typically the woman, because a QTIP trust allows the marital deduction for one spouse’s transfer of the underlying property to a third party and not to the other spouse.