Since we have Portability in 2011 Tax-Free, do I need a Trust?

There are several reasons to use a Trust. Taxes are only 1 reason.  In fact, single people do Trusts as frequently as married couples, and there are NO tax benefits for them.

Married couples have an extra reason to consider a Trust: doubling the tax free amount with an A-B Trust.  The Republican-Obama December, 2010 Tax Extension Law gave us some interesting concepts.  Most fascinating is Portability.

Let's take George and Barbara, a married couple worth $10M:   Assume George dies in 2010.  His tax free amount under the new law is $5M.  He left it all to Barbara.  She dies shortly later.  She may leave tax free $5M.  Without a Trust, the extra $5M is taxable at her death. 

Portability starts with 2011 deaths.  Assume George had died in 2011.  Barbara's tax free amount is now $10M.  Portability lets Barbara take her Dead Spouse's Unused Exemption Amount: DSUEA, and use it like her own Tax Free Exemption.

Wow: this SOUNDS great - it eliminates need for more sophisticated Trust planning, right?

Not exactly.  There are several gotcha's in the law of Portability.

1. If Barbara remarries, she keeps George's DSUEA, unless the new husband dies.  It should be called the Most Recent Dead Spouse's UEA, because that's how the law works.  If the new husband was richer, he might have zero DSUEA.  [This might be a new criteria for Barbara: find a guy with a big DSUEA.  Match.com will have a special category!]  A Bypass Trust eliminates this risk.
2. Barbara may leave the entire $10M to her new husband, friends, anyone.  A Bypass Trust eliminates this risk.
3. Inflation: As long as she is alive, Barbara's $5M is adjusted for inflation, but George's DSUEA does not change for inflation.
4. If the assets grow to be over $10M, there might not be enough combined exemption to cover it all.
5. Barbara would have asset protection in a Bypass Trust.
6. The biggest drawback today with portability is that the  Republican-Obama Tax Law expires 12/31/2012, so if Barbara does not die by then, unless Congress extends the law further, it expires at the start of 2013.  This means that both George and Barbara must die in 2011 or 2013 to use this wonderful new idea. 
7. Generation Skipping Exclusion is NOT portable
8. DSUEA option keeps Statute of Limitations open on 1st spouse's estate.
9. Some States have death taxes severely affected by lack of Bypass Trust.  [NOT California.]
10. Survivor needs most recently deceased Spouse's Executor's co-operation to elect to use his DSUEA.  In a 2nd marriage, this may be awkward or impossible.

A Bypass Trust makes this all simple.

In summary, as simple as it sounds, portability in its present style does not work

The other benefits of a Trust continue, besides tax benefits.

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