A major advantage of current federal tax law is that estate tax exemption "portability" is now permanent. Portability simplifies estate planning by allowing a surviving spouse to use the deceased spouse's unused portion of the $5.34 million for 2014 ($5,430,000 for 2015) gift and estate tax exemption amount.

This means that married couples can maximize the benefits of their combined exemptions without the need for sophisticated estate planning involving multiple trusts. However, for many people, particularly the affluent, more-sophisticated strategies — such as a credit shelter trust — might still be more beneficial.

How Does Portability Work?

If one spouse dies and his or her estate tax exemption is not entirely used at death, the estate can permit the surviving spouse to use the deceased spouse's remaining exemption. The surviving spouse can use that amount, in addition to his or her own exemption, to make tax-free transfers during lifetime or at death.

However, portability is not as simple as it may first appear. For one thing, portability is not automatic. The executor of the deceased spouse's estate must make an election on a timely filed estate tax return, even if a return would not otherwise be required. Keep in mind that filing an estate tax return is a complex endeavor which will require additional time and consideration. Additionally, special rules apply to surviving spouses who are predeceased by more than one spouse.

Also, if your estate plan includes bequests to grandchildren, remember that the generation-skipping transfer tax exemption is not covered by the portability provision.

Benefits of a Credit Shelter Trust

While portability has its share of complexities, it is still simpler than a credit shelter trust (sometimes referred to as a "bypass" trust). Nevertheless, creating such a trust can be a better alternative. Why? Because a credit shelter trust offers a major advantage over portability: It can protect future appreciation on the trust's assets from estate taxes.

If you and your spouse have estates that exceed the combined exemption amount threshold ($10.68 million for 2014 and $10.86 million for 2015) or may do so at some point in the future, a credit shelter trust remains the most effective strategy for minimizing estate taxes.

When assets are placed in a credit shelter trust on the first spouse's death, their value is frozen for estate tax purposes. This means that any future appreciation on those assets bypasses your surviving spouse's estate. But if you rely on portability, future appreciation will be included in your spouse's estate. This could trigger significant estate tax liability.

Even if you and your spouse's combined estate is unlikely to ever exceed your combined exemption, trust planning offers important benefits such as:

Asset Protection — Portability allows you to leave your wealth to your spouse outright without wasting your estate tax exemption. But it does nothing to protect those assets from your spouse's creditors or financial mismanagement. Well-designed and managed trusts remain the most effective way to protect your assets and preserve them for future generations.

Remarriage Protection — Trust planning ensures that your children are provided for, even if your spouse remarries. A credit shelter trust can prevent your spouse from spending your children's inheritance on his or her new spouse or on children from the subsequent marriage. It also avoids the potential loss of portability benefits in the event your spouse's new spouse dies. Portability is available only for a person's most recently deceased spouse. If your spouse remarries and his or her new spouse dies, portability will be limited to the new spouse's unused exemption — which could be little or nothing.

Generation-Skipping Transfer (GST) Tax Planning — The GST tax exemption ($5.34 million for 2014 and $5.43 for 2015) is not portable. So if you and your spouse wish to maximize your GST exemptions for bequests to your grandchildren, you will have another reason to consider trusts.

Do not forget state estate tax planning. Unless your state's law recognizes portability for estate tax purposes, you may need to use trust planning to preserve your state exemption amounts.

Plan Carefully

Portability has the benefit of simplicity, but before you rely on it, review your situation and consider whether you would be better off with a credit shelter trust. If you decide to rely on portability, keep in mind that it is not automatic. A surviving spouse can take advantage of portability only if the deceased spouse's executor makes an election on a timely filed estate tax return.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.