Portability and Blended Families…May Not Be A Good Mix!

Portability has been discussed in a prior blog but as the federal statute is fairly new, case law has been scarce. A recent Oklahoma Supreme Court (the “Court”) case has lawyers rethinking prenuptial and postnuptial agreements and the drafting of estate planning documents.

As a reminder, the following is an example of portability. Bob dies transferring all of his assets to his wife, Emma. As the transfer to Emma qualifies for a 100% marital deduction, his estate does not have to use any of his applicable exclusion amount of $5.490 million (equivalent to a $2.196 estate tax savings). Rather than waste Bob’s applicable exclusion amount, federal law allows Emma to “port” over her deceased husband’s unused applicable exclusion amount (” DSUE”).

If Emma prepares and files an appropriate Form 706- United States Estate (and Generation-Skipping Transfer) Tax Return for Bob’s estate within 9 months after the date of Bob’s death (15 months if an extension is requested) and elects portability, then Emma can use Bob’s DSUE, in addition to her own applicable exclusion amount, either via gifting or at her death.

The filing of the return electing portability is an easy decision in first long term marriages. The decision becomes more difficult if, instead Bob has children from a prior marriage, and Emma is the third wife. The executor (federal law defines executor) files the return to elect portability. If the executor is a decedent’s child, then the child may not want to pay to file a return to elect portability to benefit the surviving third wife. This issue is addressed in this Oklahoma decision, the only decision that this author knows interpreting this federal law.

Anne Vose (“Decedent”) died in 2016, survived by husband, C.A. Vose (“CA”) and a stepson (“Lee”).  After several hearings, Lee was appointed as the estate’s executor. Decedent and CA signed a Antenuptial Agreement (the “Agreement”) in 2006 whereby Decedent and CA waived all “claims and rights, actual, inchoate, vested, or contingent, in law or equity, which he or she may acquire in or to the separate property, income, assets and liability of the other by reason of their marriage, under the laws of any state or the United States…”.

CA wanted Lee to file a Form 706 return for Decedent to elect portability for the benefit of CA. The lower district court ordered that Lee provide CA with a list of records necessary to file the return, ordered that if DSUE was available, then Lee had to file the From 706 electing portability, allowing CA 60 days to review the return and ordered CA to pay for the filing of the return.

Lee appealed to the Court and argued that (1) the district court had no jurisdiction over the matter as federal law preempted this action (2) CA waived his rights to the portability election in the Agreement and thus, CA had no standing (or right) to bring the lawsuit and (3) if Lee had to file the Form 706, then Lee, as executor of Decedent’s estate, had the right to be compensated by CA for for the value of the DSUE election as the DSUE amount would benefit CA and because electing the DSUE would extend the time for audit of Decedent’s return.

The Court determined that the portability  election, although provided under federal tax law, was NOT preempted by federal law as the statute did not provide for any preemption.The Court stated that the statute was silent as to the effect of state law and determined, after analyzing the Congressional record and the statute, that the order was within the jurisdiction of the district court and was not preempted by federal law.

Lee also asserted that a direct conflict existed between the district court order compelling him to prepare the Form 706 and the statute which grants him discretion as to whether or not he will do so. The Court noted that the statute is silent as to the effect of state law. The district court ordered him to file the return “in response to arguments that his fiduciary obligations as an estate administrator under Oklahoma law compel him to so”. As the Court ruled the district court’s decision was not preempted by federal law, the Court affirmed this decision.

Lee’s argument that CA had no standing as he waived all his marital rights under the Agreement was also dismissed. The Court determined that, although CA was not a beneficiary of Decedent’s assets under the Agreement, he had a pecuniary interest as the surviving spouse in the portability of the DSUE.

The Court found that CA could “not be bound by a waiver of one’s rights unless it was made with full knowledge of the right intended to be waived”. As portability did not come into existence until 2010 and made permanent in 2013, CA could not have waived such right. Specifically, the Court noted that the Agreement was silent as to portability “because the change in law was unforeseeable to the parties when the contract was made.”

Finally, the Court dismissed Lee’s claim for consideration for the DSUE. As the only value of the DSUE was to CA, no consideration to the estate was required. Further, the Court determined that any risk to the estate because of an extended audit potential with the Internal Revenue Service was outweighed “by Lee’s fiduciary obligation to preserve the assets of the estate and safeguard” CA’s interest in the DSUE.

ADVICE: Wow! Every attorney and client needs to review prenuptial and postnuptial agreements that have been drafted before portability was enacted. Specific language regarding portability should be included in all future agreements.

Portability provisions should be included in estate planning documents ESPECIALLY if the clients have  blended families. Be sure and provide whom is responsible for payment of the fees to prepare the return for electing portability. Congress had the ability to provide that a surviving spouse, not acting as executor or personal representative, could file the return but chose to not include that language in the statute or the regulations.

This author is not aware of any Florida case law interpreting portability. As this decision was rendered by a state supreme court, this decision will likely influence a future Florida court opinion.

WORD OF THE WEEK: Res judicata is a legal term that a matter that has been adjudicated by a competent court and may not be pursued further by the same parties. This doctrine can be used as a defense to an action to avoid unnecessary litigation. Three requirements are necessary (1) earlier decision on issue, (2) final judgement on the merits and (3) same parties or parties in privity with the same parties.

GENEROSITY IS A KEY TO HAPPINESS …REACH OUT AND HELP SOMEONE TODAY!  😎