When the IRS enacted the portability election provisions in 2011, which allowed estates of married taxpayers to pass along the unused part of their estate and gift tax exclusion amount to their surviving spouse, it remarked that it “expect[ed] that most estates of people who are married will want to make the portability election. . . .” But, to elect portability, an estate tax return must be filed in order to pass along the exclusion. So, what happens when an executor refuses to elect portability? Take them to court, of course.
In In the Matter of the Estate of Vose, the decedent and her spouse entered into an antenuptial agreement prior to their marriage, which provided:
6.1 Waiver: Except as otherwise specifically provided in this Agreement, [Spouse] and [Decedent] mutually waive, discharge, and release each other to the fullest extent lawfully possible from any and all claims and rights, actual, inchoate, vested, or contingent, in law or equity, which he or she may aquire [sic] in or to the separate property, income, assets and liabilities of the other by reason of their marriage, under the laws of any state or the United States, including but not limited to . . . [t]he right to a distributive share in the estate of the other should he or she die intestate pursuant to Title 84 Okla. Stat., 213, or otherwise.
After the decedent’s death, the surviving spouse sought a court order compelling the administrator of the estate (the decedent’s son by another marriage) to “timely prepare and file a federal estate tax return for purposes of irrevocably electing portability of decedent’s deceased spousal unused exclusion amount (DSUE application).” The administrator argued that the decision to elect portability of the DSUE is within the discretion of the administrator and entirely his to make and contrary to the antenuptial agreement. The trial court ordered, if DSUE was available, that the administrator timely file an estate tax return electing portability. The Oklahoma Supreme Court agreed with the trial court.
The Oklahoma Supreme Court’s decision includes a nice review of the history of portability and the election process and then addressed the many arguments of the administrator, such as jurisdiction, federal preemption, the surviving spouse’s standing, and the antenuptial agreement. Two of the arguments are worth taking a closer look at because of their implications.
The first is the preemption argument. The administrator argued that the discretion granted to him to elect portability under the terms of 26 U.S.C.A. 2010 trumped Oklahoma law concerning the fiduciary obligations owed by estate administrators to potential beneficiaries of the estate. The Oklahoma Supreme Court found that because the federal statute was silent as to the effect state laws might have on how the administrator must make the portability election, state law essentially fills in the gap. Thus, absent an expressed Congressional purpose served by the DSUE election choice, state fiduciary law could restrict that choice, as it did here.
The second is the antenuptial agreement. Here, timing was everything. The antenuptial agreement was entered into by the spouses when portability election did not exist. While the spouses intended to waive their marital rights under the law as it existed at the time, the change in the law was unforeseeable to the spouses when that antenuptial contract was made. Thus, they could not waive a right that they didn’t know would accrue in the future and, therefore, the surviving spouse could assert an interest in portability of the DSUE.