Portability: The Expensive Part (Part II)

Hello friends.

Last week: portability isn't automatic and isn't a plan. This week, the part I said was expensive: the one exemption that doesn't port at all. If your client's plan leaves everything outright to the surviving spouse, half the family's generation-skipping capacity is quietly scheduled to disappear at the first death, and the fix looks a lot like the trusts everyone stopped drafting when portability arrived.

First, one quick thing: if you have a wealthy client whose plan leaves everything outright to the surviving spouse, reply "GST" and I'll send you a short blurb you can copy-paste to them.

In This Issue:

— Doug Harvey

Quick refresher: the generation-skipping transfer tax exists because old money figured out that if the estate tax hits at every generation, the move is to skip generations. So Congress added a second tax on transfers to grandchildren and beyond, plus a second exemption to go with it (for 2026 it’s $15 million per person, same number as the estate exemption, different exemption).

Now the part last week's issue promised: the GST exemption is not portable. Not "portable if you file the right form." There is no form. Die leaving everything outright to your spouse and your estate exemption carries over (assuming someone files the 706, which, see last week), but your GST exemption just evaporates.

For a family that wants trusts running for grandchildren, that's half their generation-skipping capacity gone at the first death, and no one notices, because nothing visible happens: the assets transfer, the surviving spouse is fine, and the problem doesn't surface until a generation later, when it's unfixable.

The fix has to happen while both spouses are alive. Build the plan so assets land in trust at the first death, then make what's called a reverse QTIP election, which lets the deceased spouse's GST exemption attach to that trust and keep sheltering it: spouse provided for, exemption preserved, everybody's lawyer slightly smug. Which is to say, the cure for portability's biggest gap is the trust-at-first-death planning that portability supposedly made unnecessary. Funny how that goes.

A couple with a taxable estate wanted the classic structure: everything outright to the surviving spouse, then everything to the kids. We walked through what the pros and cons, and they weighed it and chose outright anyway, because "keep it simple" was the goal, and they meant it. Then at the signing meeting we talked it through once more, and this time something clicked — keeping it simple meant signing up for voluntary taxes, millions of dollars of them, that the family could simply decline. They decided to leave assets in trust for the survivor at the first death instead. Added security for the spouse, both GST exemptions preserved, voluntary taxes declined.

“Keep it simple” is a strong default, but it’s important to ask whether simple is worth millions of dollars.

If they have a taxable estate, then they could be leaving future generations with a huge tax bill.

This is the line that helps them save money:

"Simple is a fine goal. But at your numbers, an outright plan is signing up to pay a voluntary tax that could be worth millions. Before you decide, it's worth a call with an estate planning attorney to see the price tag."

Unfortunately, a lot of times it’s attorneys who don’t deal with wealthy clients who say this.

Here’s the fix:

"The estate exemption ports. The GST exemption doesn't. There's no form for it and no five-year fix. If the family’s wealth is meant to reach the grandchildren, an outright transfer at the first death costs them half their generation-skipping capacity, permanently."

Enough about death and taxes. Doing anything fun this summer? Hit reply and tell me. I read everything, and I'd rather hear about your lake trip than draft another footnote.