Portability and Deceased Spouse – Intro

Portability: Which Spouse Is on First

The 2010 TRA’s portability provision is effective for
estates of decedents dying after December 31, 2010.

Section 303 of the 2010 TRA: “(4) Deceased spousal unused
exclusion amount.-For purposes of this subsection, with respect to a surviving
spouse of a deceased spouse dying after December 31, 2010, the term “deceased
spousal unused exclusion amount” means the lesser of- (A) the basic exclusion
amount, or (B) the excess of- (i) the basic exclusion amount of the last such
deceased spouse of such surviving spouse, over  (ii) the amount with
respect to which the tentative tax is determined under section 2001(b)(1) on
the estate of such deceased spouse.”

The phrase “basic exclusion amount of the last such
deceased spouse” implies that the first-to-die spouse’s exclusion is not
inflation adjusted as suggested earlier. Furthermore, the phrase “last such
deceased spouse” has a special impact (different from previous portability
legislative proposals. The phrase implies that if Husband 1 is married to Wife
1 and Husband 1 dies, Wife 1 would be able to utilize Husband 1’s remaining
exclusion. However, what if Wife 1 remarries Husband 2? Would Wife 1’s estate
only be entitled to utilize the remaining exclusion from Husband 2? While
remarriage might be viewed as reasonably cutting off the right to use the prior
spouse’s exclusion, this does not appear to be the manner in which the law
operates.

Thus, this new law provides that the unused exemption is
only available from the “last such deceased spouse”.  This means that if
the surviving Wife 1 remarries Husband 2, she may still use the unused
exemption from Husband 1 because Husband 1 still remains her “last deceased
spouse” so long as Husband 2 is alive.  When Husband 2 dies, then Wife 1
can only use Husband 2’s unused exemption, and Wife 1 can no longer use
Husband 1’s unused exemption (if any). Although it seems somewhat odd that
being married to a new spouse with a new exemption would still mandate the use
of the last spouse’s exemption, that seems to be the case.

Privity on Use of Deceased Spouse Exclusion

The use of the exclusion appears to also require marriage,
in that, the new spouse of a “surviving spouse” cannot use that surviving spouse’s prior
deceased spouse’s unused exclusion, if the surviving spouse dies before the
taxpayer in question.

Example:
Wife 1 is married to Husband 1. Husband 1 dies. Wife 1 could use Husband 1’s
unused exclusion. Wife 1 remarries to Husband 2. If Wife 1 dies, Husband 2 can
use Wife 1’s unused exclusion. However, Husband 2 cannot use the unused
exclusion of Wife 1’s former deceased spouse, Husband 1.

The conclusion is not certain at present. For example,
would it matter if Wife 1’s executor used the predeceased spouse’s unused
exclusion of Husband 1 to avoid any tax in Wife 1’s estate, and then sought to
file an estate tax return permitting Husband 2 to utilize Wife 1’s own
exclusion (which perhaps was undiminished as a result of her use of Husband 1’s
theretofore unused exclusion)?

These rules make the likelihood of the use of a particular prior
deceased spouse’s exclusion somewhat precarious, as it will depend on
remarriage, longevity of the new spouse, the new spouses exclusion, and as will be
discussed later, the filing of an estate tax return many will undoubtedly
overlook. Portability seems to bring to estate planning about the same quantum
of simplicity that the GST automatic allocation rules created!