Optimizing Wealth Transfer under the U.S. Transfer Tax Regime

Robert Weiss and Victoria Bolton
Published Date:
Jun 1, 2015

The U.S. transfer tax regime, with its relatively new portability feature, high exclusion levels, and stability—along with the convergence of maximum estate and ordinary income tax rates—might tempt taxpayers into thinking that lifetime strategic planning is no longer needed or that simplified testamentary plans will produce better results for families. JPMorgan research indicates, however, that for most wealthy couples, thoughtful planning is more important than ever. In order to transfer wealth in optimal ways, these couples and their advisors must focus heightened attention on income tax planning, spending levels, portfolio management, and state and federal tax rates.

Considerations for Advisors

Importantly, where couples fall along the wealth spectrum will dictate, in large part, the depth of analysis necessary to properly advise them.

Some “affluent” couples (defined as those with a net worth between $1 million and $10 million) may be able to get by with a basic estate plan—that is, one in which the dispositive instrument leaves the estate of the first spouse to die to the surviving spouse outright. But affluent couples should use that plan only if they can affirmatively state, among other important considerations, that the survivor will carry out the plan without alteration (i.e., that neither one of them will remarry).

The high-net-worth population (defined as couples with a net worth from $5 million to $50 million) is seeing the greatest shift in planning complexity. Developing a tax-efficient plan for these couples is challenging, due in large part to uncertainty over whether they will owe U.S. estate taxes on the survivor’s death. That uncertainty is compounded by the vagaries of a couple’s income, spending, life expectancies, and states of residence, among other factors.  Consequently, high-net-worth couples should review their estate plans frequently in order to ensure that their financial situations and estate plans are congruent and that rigorous analysis is done to make sure that expectations are being met.

For ultra-high-net-worth couples (defined as couples with a net worth greater than $50 million), the focus on tax-efficient planning has not changed, notwithstanding the new U.S. transfer tax regime. These couples are likely being advised to continue doing everything they already have been doing, only more. Indeed, there has been an uptick in giving within the ultra-high-net-worth population, not only to children and grandchildren but also to extended family members and philanthropic organizations.

Creating and Using Trusts

When it comes to testamentary estate planning, the advent of portability has thrown into doubt the continued relevance of the credit shelter trust (CST). Before portability was an option, estate plans often included a CST as a matter of course, with the goal of preserving the valuable estate tax exclusion amount of the first spouse to die, even at the cost of the basis step-up.  Now, though, the gap has narrowed between the federal transfer tax rate (40%) and the maximum federal long-term capital gains rate (23.8%).

As a result, some might argue that relying on portability alone is more beneficial (because of the resulting lack of capital gains tax liability) than allocating the estate tax exclusion amount to a CST and forgoing the basis step-up. Yet, this argument fails to account for several factors, not least of which is the inability of the surviving spouse to “port” the deceased spouse’s generation-skipping transfer (GST) tax exemption. Moreover, JP Morgan’s analysis shows that, in many instances, using a CST will preserve more family wealth than relaying on portability alone, as long as 1) the CST lasts for more than a few years, 2) there is positive investment performance during that time, and 3) distributions from the CST are minimal during the life of the surviving spouse.

Lifetime strategic planning is also critical under the new U.S. transfer tax regime. To the extent that assets are available, JP Morgan’s analysis finds that funding a lifetime dynasty trust is likely to result in a greater financial benefit than the creation of a testamentary CST. Although creating such a dynasty trust means the gifting couple loses the advantages of both portability and a step-up in basis upon the grantor’s death, the value of these two benefits combined is likely to be far less than the value of moving the couple’s assets outside the transfer tax system as soon as possible. 

One powerful form of lifetime planning is what is sometimes known as a spousal lifetime access trust (SLAT). Under the terms of a SLAT, a grantor can create a dynasty trust during lifetime for the benefit of descendants, with the grantor’s spouse named as a permitted beneficiary.  Naming the spouse as a beneficiary provides optionality to the family: should trust assets be needed by the first generation at some point in the future, the trustee could make a distribution to the spouse. Such a distribution would be an inefficient use of family wealth and so would be made only in exigent circumstances.

Of course, there are many reasons other than tax efficiency to create and use trusts: creditor protection for trust beneficiaries, professional management of trust assets by trustees, and the grantor’s ability to set direction for beneficiaries, to name a few. Couples who find value in trusts because of these more qualitative characteristics should be encouraged to learn that their use would not sacrifice transfer tax efficiency; indeed, that strategic lifetime and testamentary planning is likely to yield better financial results for their families than a more passive estate plan.

boltonVictoria F. Bolton, is a wealth advisor for J.P. Morgan’s Private Bank in Greenwich, Conn. Her career has focused on advising wealthy individuals, families, and family offices on matters involving wealth management, tax planning, and philanthropy. In addition, she is admitted to practice law in New York and Connecticut and is a member of the New York, Connecticut, and Greenwich Bar Associations. She can be reached at victoria.f.bolton@jpmorgan.com.


robert_weissRobert A. Weiss, CFA, is the global head of J.P. Morgan’s Private Bank’s Advice Lab, where he works with a team of multidisciplinary professionals responsible for developing innovative planning strategies in the areas of tax, executive compensation, private business advisory, philanthropy and financial analytics to help families optimize their wealth within a goals-based construct. 

JP Morgan Chase & Co., its affiliates, subsidiaries and employees do not provide individual tax advice. Please consult your individual tax advisors prior to initiating any strategy.


Unless otherwise specifically stated, any views or opinions expressed herein are solely those of the authors listed, and may differ from the views and opinions expressed by JPMorgan Chase Bank, National Association and its affiliates.  This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. In no event shall J.P. Morgan be liable for any use by any party, or for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein, and such information may not be relied upon by you in evaluating the merits of participating in any transaction.  Printed by permission of JPMorgan Chase & Co. © 2015. JPMorgan Chase & Co. All Rights Reserved.


JP Morgan Chase & Co., its affiliates, subsidiaries and employees do not provide individual tax advice. Please consult your individual tax advisors prior to initiating any strategy


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