By by Martin M. Shenkman, CPA, MBA, JD
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.
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!
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