Some years ago, Cindy Crawford burst upon the modeling world as a natural beauty from DeKalb, Ill. At first blush, she was a sight to behold. But even Cindy Crawford acknowledges she doesn’t wake up looking like Cindy Crawford.
Perhaps a bit like Cindy Crawford, the estate-planning concept of portability has burst on the planning scene. A quick peek may lead one to think portability is a beautiful idea that’s revolutionized estate planning. However, a closer look at portability may leave you crying like Tammy Faye Bakker.
Portability is designed to benefit married couples in certain circumstances. For example, with portability, if a husband predeceases his wife and doesn’t fully utilize his federal estate tax exemption, then his wife can use the husband’s unused federal estate tax exemption.
Five Reasons Why Portability May Not be Model Perfect
However, portability is not all you might hope it to be. So why could reliance upon portability leave you crying? Here are five reasons:
- One benefit of traditional planning, rather than relying on portability, is that the children of the predeceased spouse are more likely to receive the inheritance the predeceased spouse intended. More than a few clients have expressed concern about the financial risks if their surviving spouse should remarry. If so, is it wise to simply hope the children of the first marriage will ultimately receive assets when the surviving spouse passes away? Do you really think your client’s spouse’s next spouse will adore his children and grandchildren? Further, if remarriage occurs and the new spouse also predeceases, the portability of the first spouse’s exemption vanishes.
- A state with an estate tax, like Cindy Crawford’s Illinois, may not allow the state’s estate-tax exemption to be portable. That means a wealthy couple relying entirely on portability may unnecessarily pay state estate taxes.
- Traditional estate planning, which relies on thoughtful asset titling between spouses, affords at least some creditor protection to surviving spouses. Complete reliance on portability would eliminate the possibility of creditor protection.
- The federal generation-skipping transfer tax exemption isn’t portable. This means wealthy families who completely rely on portability may voluntarily and unnecessarily re-expose their assets to estate taxes in their children’s estates.
- To enjoy the benefit of portability, the surviving spouse must timely file an estate tax return for the predeceased spouse. If a couple is so cavalier as to rely on portability, rather than actual estate planning, will the surviving spouse be attentive enough to timely file a complex federal estate tax return?
Thoughtful Estate Planning
Prudence suggests that leaving a desired result to hope or fate is naïve. The better solution may be thoughtful estate planning and attention to asset titling, rather than reliance on portability.
Certainly, the world is a better place with the existence of folks like Cindy Crawford. Likewise, the estate-planning world is advantaged to have portability to fall back on if traditional estate planning isn’t employed. But, just as Cindy Crawford acknowledged that she’s not as beautiful as she appears in photographs, portability isn’t as beautiful as many believe.