Does Credit Shelter “Portability” Help You?

Good Morning Relaxing Retirement Subscriber,

There are very few certainties in the world. One of them is that governments will always find ways to collect taxes from you.

During your lifetime, they do so in abundance through income, capital gains, sales, and real estate taxes to name a few.

However, taxes are also levied on the value of your estate when you give it away during your lifetime, or after you pass away.

In other words, even after a lifetime of paying dozens of taxes, the federal government then taxes your heirs on what remains.

However, before those taxes kick in, you may pass on $5.49 million (in 2017).

That $5.49 million credit exemption has grown over the years from zero, to $600,000, to $1 million on up. (However, on the state level here in Massachusetts, that threshold is still only $1 million.)

On the federal level, on anything over $5.49 million, your heirs will pay a 40% estate tax to the federal government. So, if your estate (including real estate and life insurance proceeds) is $6.49 million, your heirs will pay $400,000 in estate taxes to the federal government.

This, of course, is in addition to what your heirs pay to the state of Massachusetts (or the state you reside in).


When it comes to calculating the amount that your heirs will owe, a little-known provision that most particularly impacts our Relaxing Retirement members is a concept known as “portability of the estate tax exemption”.

What exactly does this mean?

It means a husband and wife can leave their federal estate tax exemptions to each other. The first spouse to die can automatically leave his/her $5.49 million estate tax free exemption to the surviving spouse, so the surviving spouse will have a $10.98 million exemption.

No longer do you have to create "credit shelter trust" estate plans to make full use of each of your exemptions.

This makes estate planning much easier, especially when most of your assets are in IRAs!

A Real-Life Case Study

Let me give you a very simple, clean-cut case study. This will take a moment to clarify, but please bear with me because it’s all good news:

John and Sarah are married with three children. To keep things simple and to highlight the issue at hand, let’s assume that John’s only asset is a $5.49 million IRA, and Sarah’s only asset is her $5.49 million IRA.

With $10.98 million of combined assets, they obviously want to make sure they take full advantage of their estate tax exemptions, so the full $10.98 million can eventually pass to their three children with no federal estate tax.

Without portability of the estate tax exemption, the only way they could have taken advantage of their exemptions was for the first spouse to die NOT to leave his or her $5.49 million IRA to the surviving spouse.

Under the old way of saving estate taxes for a married couple, we would tell John not to name Sarah as beneficiary of his IRA!

If he did, Sarah would wind up with $10.98 million of assets and only $5.49 million of estate tax exemption! If Sarah passed away the next day, $5.49 million would be subject to the estate tax!

Under the old way of estate tax planning, the only way John could make use of his federal estate tax exemption would be to leave his IRA either directly to the children or to a "credit shelter" or "bypass" trust for the life benefit of Sarah.

Leaving the IRA directly to the children could be a good tax move, but in my experience, most of our Relaxing Retirement members don’t like that because it takes money away from the surviving spouse.

Leaving the IRA to a credit shelter trust for the surviving spouse seems to protect the surviving spouse financially, and it definitely saves estate taxes for the children by keeping the IRA out of the surviving spouse’s estate.

However, on the flip side, it would cause a huge loss of income tax benefits. There is no spousal rollover and no “stretch or inherited” IRA payout over the children’s life expectancy.

Instead, the entire IRA gets dumped out into the credit shelter trust over the single life expectancy of the surviving spouse, a much shorter period of time.

Prior to the current tax policy, members like John and Sarah had to make a hard choice: Do we go for the income tax benefits of the spousal rollover by leaving the IRA outright to the surviving spouse, even though that costs extra estate taxes by wasting the first spouse’s estate tax exemption?

Or, do we save estate taxes by leaving the benefits to a credit shelter trust but give up on the long-term deferral that would otherwise be available via the spousal rollover?

Thanks to the current law, you no longer have to make that particular hard choice.

Instead, John can leave his $5.49 million IRA outright to Sarah and still leave her his $5.49 million estate tax exemption.

They can now get the income tax savings of long-term deferral of distributions via the spousal rollover, without having to waste one spouse’s estate tax exemption to get it. When Sarah later dies, she would have a $10.98 million IRA and a $10.98 million estate tax exemption!

Committed to Your Relaxing Retirement,

Jack Phelps

The Retirement Coach
P.S.: WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at Or they can subscribe at
I appreciate the trust you place in me. Thank you! (The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)