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Addressing Portability Of Estate & Gift Tax Exemptions In Premarital Agreements

A recent decision by the Oklahoma Supreme Court is instructive for couples in New Jersey and other states who are entering into Premarital Agreements.

New Jersey, like many other states, permits couples to enter into Premarital Agreements.  Those agreements typically address a range of issues, including tax issues.  While income taxes are usually the primary concern, it is important to also address Estate and Gift Tax issues, particularly the issue of “Portability.”

The Federal Estate Tax is an excise tax on gifts made at death, whether made under a Will, trust, beneficiary designation, or otherwise.  The Federal Gift Tax is an excise tax on lifetime gifts.  Transfers between spouses who are U.S. Citizens are exempt from both Estate and Gift Tax.  Beyond that, each individual can transfer, either during lifetime or at death, an amount of property equal to his or her “Exemption” without Estate or Gift Tax.  The Exemption is $5,490,000 in 2017, and increases each year to account for inflation.

Since 2011, the unused Exemption of a person’s last deceased spouse can be transferred to the surviving spouse through an elective process commonly known as Portability.  The Portability election is made by the Personal Representative (i.e. Executor) of the deceased spouse’s estate on a timely filed Federal Estate Tax Return.  In many instances the surviving spouse is the Personal Representative and will routinely make the Portability election by filing a Federal Estate Tax Return, whether one is otherwise required or not.  But what if the surviving spouse is not the Personal Representative, which is not uncommon in second marriages where there are children from a prior marriage who may also be beneficiaries under the Will?

That issue was addressed in a recent case decided by the Oklahoma Supreme Court entitled, In the Matter of Estate of Anne S. Vose v. Lee.  In that case, the decedent and her spouse entered into a Premarital Agreement.  As is customary in these agreements, each spouse waived all rights to the deceased spouse’s estate.  The wife died and her son was ultimately appointed as Personal Representative of the estate.  The husband filed an action in court to compel the son to file a Federal Estate Tax Return and elect Portability.

Surprisingly, the court held that the Personal Representative had an obligation to make the Portability election.  While it is unclear whether a court in New Jersey or any other state would reach a similar conclusion, couples can avoid this scenario entirely by addressing the issue in their Premarital Agreement.

Each spouse can agree to cause his or her estate (usually by making a provision in a Will) to make the Portability election, provided that if a Federal Estate Tax Return is not otherwise require, then the surviving spouse will often agree to pay for the cost of filing the return.  Alternatively, each spouse can agree that they are not required to cause their estates to make the Portability election.  Either way, addressing the issue in advance should avoid the type of litigation which ensued in the Vose case.

If you have any questions about this post or any other matters, please contact me at jjcostellojr@nmmlaw.com.