estate tax "portability provision"

Best explained with an example. H1 & W are married with assets jointly owned. H1 dies and leaves everything to W. W files an estate tax return and transfers H1's $5.25M. W now has $10.5M exclusion. W marries H2.

H2 dies. H1's $5.25m is lost. W can only transfer any unused amount of H2's $5.25M. If H2 has less than $5.25M or even if H2 has no amount unused, tough cookie. H1's unused amount is gone forever.

Change it and have W die before H2. In this instance, W's $10.5M exclusion can be used against her estate. Any unused amount can be transferred to H2 but it is limited to a max transfer of $5.25M

why is H1's lost, in your first example? I didn't see that in the code.

See Sec 303 of PL 111-312 that modified Sec 2010 of the IRC. It talks about transferring the unused amount from the "last" deceased spouse.

I may be stating the obvious here - So, it would follow that for high net worth people with that second spouse whose first spouse had this exclusion transferred, a trust for the new spouse is indicated as he cannot pass his exclusion to his already $10.5M'd spouse. Right?

I find this whole subject discombulating. I am also not an expert in nor familiar with all the estate planning tools available to those with high net worths. That said, here is what I have learned. Portability is Plan B. Plan A is a well thought out estate plan. Depending on the situation, marital deduction trusts, QTIPs, bypass or unified credit trusts may provide a better result than just portability. If GST is an issue, then fuhgeddabout portability as it doesn't apply.

why is H1's lost, in your first example? I didn't see that in the code. =============== It's lost because only the LAST spouse counts. The remarriage wipes it out. (At least, that is the way it was explained when I heard about this.)

thank you. it is right there in black and white.

I would say that if you felt you might be in that situation, you should do a trust for the first deceased spouse (before their death) and not rely on the portability provision.

To take it a step further, while they say the portability provision is now "made permanent" there is nothing to stop them from amending the code and taking it away. And since it only affects "the wealthy" few will complain. I would lock it in via a trust. You would also get appreciated assets out of the estates before they appreciate further.

The code specifically says that it applies only to the remaining exclusion of the person's last spouse.