Portability and Tenancy by the Entireties Combine for Asset Protection Without Sacrificing Estate Tax Planning

January 27, 2015Articles Estate Planning Blog

Before portability became part of our estate planning vocabulary, planners seeking asset protection from tenancy by the entirety (TBE) property ownership and federal estate tax minimization usually needed to choose between the two. Titling assets as TBE would limit the availability of those assets to fund a credit shelter trust. But, titling those assets in the sole name of either the husband or wife would expose those assets to the owner's creditors. If your client lives in a state where TBE ownership bars the creditors of one spouse from attaching an interest in TBE property, then portability may provide your client with previously unavailable estate tax relief.

Before making the recommendation to retitle assets as TBE, consider the following:

  • Make sure "applicable state law" provides the protection you think it does. Applicable state law may be the law of the state where the property is situated (in the case of real estate) or the client's state of domicile (most non-real estate assets).
  • What happens if there is a divorce? Has the retitling transmuted the property into a marital asset that is now up for grabs when marital property is divided?
  • Is any estate planning being defeated? Relying on portability isn't always better than funding a credit shelter trust in the conventional manner. For example, GST exemption is not portable and any exemption transferred to a surviving spouse is not inflation adjusted and could be lost in remarriage.
  • Is any income tax planning being defeated? In most cases, if the spouse who dies first was the original owner of the property, the income tax basis step-up is lost for half the property.
  • What happens if the spouse who is not subject to the risk of creditors dies first?

This list isn't exhaustive. It's simply intended to show that retitling assets as TBE is often a good idea, but is not always the no-brainer it might appear to be at first glance.