Portability of the Predeceased Spouse’s Unused Exclusion

The 2012 Tax Relief Act allows a surviving spouse to utilize the unused federal exclusion amount of his or her most recently deceased spouse and add it to the surviving spouse’s exclusion amount in order to increase the assets that the surviving spouse can protect from estate tax at the surviving spouse’s death, provided that the Executor of the deceased spouse files a federal estate tax return on IRS Form 706 within nine (9) months following the death of the predeceasing spouse.

In this manner, the surviving spouse may utilize the “ported” exclusion amount of his or her most recently deceased spouse to: (i) make lifetime transfers in excess of the tax-free annual exclusion (currently, $14,000 per person per year); and (ii) increase the amount of assets to be protected from estate tax at the surviving spouse’s death. Any lifetime transfers above the annual exclusion amount will correspondingly decrease the estate tax exclusion amount at the surviving spouse’s death. Unlike the federal estate tax, the generation skipping transfer tax is not portable between spouses. In addition, state estate, gift and generation skipping transfer taxes are not portable between spouses for the majority of states, including Virginia. Further, the imported exclusion of the surviving spouse only applies to the surviving spouse’s most recently deceased spouse.

With regard to the “Most Recently Deceased Spouse Rule,” the portability of the predeceased spouse’s exclusion is usable by the surviving spouse solely as it applies to the “most recently deceased spouse.” If the surviving spouse remarries and the surviving spouse’s spouse #2 dies and leaves his or her exclusion to the beneficiaries of the deceased spouse #2 (and not to the surviving spouse), then the surviving spouse will lose the “ported” exclusion of the deceased spouse #1 since the portability provision only applies to the surviving spouse’s most recently deceased spouse. In such case, the surviving spouse will have only his or her own exclusion amount to protect assets from estate tax at the surviving spouse’s death.