Portability Formulas in Estate Planning Documents: Part I

Illustrations and explanations of a tax, and non-tax, tug-of-war

This is a continuation of the series on everything you ever wanted to know about estate planning trusts.  For an intro and index to this series, please click here.  The linked article will have a series index that gets updated periodically as well, so please bookmark it.

Table of Contents

1. Where We Left Off

2. Sweetheart Plan

3. Residuary to Marital Trust

4. What’s Next?

Where We Left Off

In a prior article, we discussed some surface background and issues as relates to marital trust funding formulas fashioned as “A/B” formulas, under which the remaining estate tax applicable exclusion of the first spouse to die passes into a credit shelter trust with the balance going to a marital trust. 

These issues are indeed “surface,” because there is a lot that was left for later discussion so as to not overwhelm you.  This content on formulas is going to pivot into a broader series on post-mortem tax elections (a time to shine for tax lawyers and tax planners who feel left out in the current planning environment).  For now, this is just a smattering of what we will later see:

• Instruction and leeway on which of the marital share, or credit shelter share, is expressed as a pecuniary amount;

• Kenan gain related to these pecuniary amounts;

• The implications of valuation on an executor’s or trustee’s authority to fund these shares in-kind;

• The requirements of Rev. Proc. 64-19 with respect to marital deduction funding;

• Deductions of management versus transmission expenses, and how these affect the marital deduction;

• Allocations of post-death accounting income between pecuniary and residuary shares, considering the aforementioned expenses;

• How all of these issues affect allocations and trust divisions relating to GST exemption formulas;

• How state death and inheritance taxes may affect formulas and divisions; and

• Broader implications about the selection of assets to fund each share.

(These are areas where, as always, I welcome guest contributions.  Please reach out if interested.)

For now, let’s keep things “simple” – a relatively tall order given the complexity of the material to be discussed in this article.  To aid our understanding, this article and the next will lean heavily on illustrations.

The formula to be discussed is simple, and reflects how many modern estate plans for married couples under the combined estate tax basic exclusion amounts (2 x $13,610,000 for 2024) are now drafted.  The shift to this method gained steam after the creation of the portability election, but plans in this vein also were created in reaction to EGTRRA in the early 2000’s.  These modern formulas have two elements:

1. The residuary passes solely to a QTIP-eligible marital trust that will be included in the surviving spouse’s gross estate; and

2. Post-mortem elections by a surviving spouse or executor can fund a trust that (ideally) should not be included in the surviving spouse’s gross estate. 

These choices act like a light switch, to elect which spouse’s applicable exclusion, and GST exemption, should be applied to certain transfers.  Here is a quick illustration I made a while back, which illustrates this outcome:

As we will see below, the various post-mortem (after the death of the first spouse in the married couple) often rely on the availability of the portability election.  But, lest you think the portability election is a panacea for all ills, please note the following:

The portability election does not preserve the unused GST exemption of the first spouse to die.

That being said, let’s dive in to some illustrations of the modern planning landscape.  Next time, we will expand on these illustrations by explaining some “audibles” that can be called after the death of the first spouse by either the executor (in that capacity), or by the surviving spouse (in their individual capacity).

Sweetheart Plan