Portability, By-Pass Trusts, and Special By-Pass Trusts

By Richard S. Franklin, Virginia A. McArthur, & Molly B. F. Walls

Recently enacted legislation allows each US citizen or resident alien to transfer $5 million of assets free of federal gift and estate tax.1 Therefore, it is now possible for a married couple to transfer $10 million of wealth to their children with no federal gift or estate taxation and with a full step-up in basis for income tax purposes. [Certain assets, such as IRA and qualified retirement plan benefits, do not qualify for the step-up in basis.] Please also note that this legislation is set to expire at the end of 2012; after that it is not clear what the exclusion amount will be, or whether portability will continue. It is not even clear at this time that the law will remain in place until the end of 2012.

In this Update, we explain three of the ways in which a married couple can structure their foundational estate planning to achieve this $10 million transfer of wealth. Determining which of these three plans, if any of them, is appropriate for you requires careful thought. Traditionally, most couples have implemented a form of the by-pass trust plan explained in section 2, below. In order to take advantage of the combined $10 million exclusion amount, we encourage you to contact us and your other professional advisors to review whether updating your estate plan makes sense.

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