By Fred Franke
The Law Office of Frederick R. Franke, Jr. LLC
As anticipated, a relatively new federal estate tax benefit has generated litigation among family members in the state courts. The “portability” election that permits a surviving spouse to carry forward the deceased spouse’s unused federal estate tax exclusion amount is a powerful tool for married couples with federal estate tax exposure.
A critical part of portability, however, is that it is an election to be made by the personal representative. In a second (or subsequent) marriage, the personal representative may not be the surviving spouse and (more to the point), the personal representative and the surviving spouse may not see eye-to-eye.
This was the problem in a recent Oklahoma case. In Re Matter of Est. of Anne S. Vose v. Lee, ___ P.3d ___, 2017 WL 167587 (Okla. 1/17). The decedent’s son, Mr. Lee, was appointed the personal representative of his mother’s estate. The stepfather, Mr. Vose, needed the tax benefits available by portability and agreed to pay the full cost of making the portability election for Mrs. Vose. Essentially, what is needed to elect portability is to file a timely federal estate tax return and make the portability election on that return. Nevertheless, Mr. Lee refused to cooperate.
In Vose, the surviving spouse had entered into a marital agreement. In that agreement, he waived any and all rights to Mrs. Vose’s estate. Mr. Lee took the position that this waiver meant that Mr. Vose was not an heir of the decedent and had no standing to pursue his portability application in the probate court. Because the marital agreement predated the portability provisions of federal law, the Oklahoma Supreme Court held that Mr. Vose was not bound by his waiver of rights because he could not have known at the time of the execution of the agreement that he had a right to portability. Thus, the marital agreement did not bar Mr. Vose from asserting his interests in the portability of his wife’s unused applicable exclusion amount. Although Mr. Vose had agreed to pay any costs associated with preparing the necessary tax return, Mr. Lee demanded consideration from his stepfather in exchange for making the election above the actual cost of return preparation. The Oklahoma Court upheld the lower court ruling that the personal representative had a fiduciary relationship toward all parties having an interest in the estate which included Mr. Vose’s interest regardless of the effect of the marital agreement.
Implicit in the Vose decision, is that portability can be waived in a marital agreement that provides a waiver of all rights in a spouse’s estate. Although the marital agreement in Vose predated IRC provisions establishing portability had the marital agreement been entered into after portability became law the result may well have been quite different. Portability originally was a temporary provision effective in 2011, but it became permanent in 2013. Lawyers drafting marital agreements ought to consider adding a provision giving a surviving spouse the right to force a portability election provided the spouse covers the cost of the tax preparation in filing.