"Portability" allows a surviving spouse to use the unused federal estate tax exemption of the first spouse to die in cases where the first to die had insufficient assets at death to fully use his or her own exemption. While portability offers a saving grace for a married couple who had not been advised to monitor the manner in which their assets were titled or have a "bypass" trust drafted into their estate plan, it lacks the benefits of these fundamental estate planning techniques. These benefits include protecting appreciation on trust assets from estate tax at the second spouse’s death, creditor protection, generation-skipping transfer tax protection, and protecting inherited family assets from falling into the hands of a second spouse. Portability is scheduled to expire in 2013. Thus, if portability is not an option, the only way to take advantage of both spouses’ federal exemptions is through traditional estate planning. We have not advised clients generally to depend on portability in designing their estate plans.
For those individuals whose spouse’s death occurred in 2011 or 2012, the recently issued temporary portability regulations clarify a number of issues. One such issue is that a surviving spouse can take into account the deceased spouse’s unused exemption amount in making gifts. In addition, the surviving spouse is deemed to have used the deceased spouse’s unused exemption prior to using his or her own exemption. For example, if a husband dies in 2012 having used no estate or gift tax exemption, he would have an unused exemption amount of about $5.12 million, which he may pass to his wife. If his wife subsequently makes a $2 million gift, her own $5.12 million exemption remains intact, and she has $3.12 million of her husband’s unused exemption amount remaining. If the estate and gift tax exemption amount falls to $1 million in 2013, she will still have her entire $1 million gift tax exemption available. However, if new legislation that includes portability is not enacted, she will no longer be able to use her husband’s unused exemption.
The temporary regulations, along with a newly issued draft estate tax return form, confirm that a federal estate tax return must be filed at the first death regardless of the size of the estate in order to qualify to use the deceased spouse’s exemption. Additionally, the temporary regulations eliminated the possibility of a widow or widower accumulating vast sums of deceased spousal unused exemption amount through multiple marriages.