A Spouse’s Right to Unused Tax Exemption Amounts

Are you married? Is it your first marriage, or a subsequent one for either you or your spouse? If you can answer “yes,” or if you have an idea you may be married in the future, you should become informed about the spousal right to transfer unused portions of the federal gift and estate tax exemption upon death.

In 2010 we gained the “Portability Rule” that allows one spouse to transfer at death the amount of any unused gift and estate tax exemption to the surviving spouse. Before this Portability Rule, any unused portion of the exemption remaining at death was lost under a classic “use it or lose it” framework. Portability allows the surviving spouse additional tax savings on later gifts, and upon death. In a recent decision favoring surviving spouses in second (or any) marriages, the Oklahoma Supreme Court required the Personal Representative of the estate to transfer the decedent spouse’s unused federal gift and estate tax exemption to the surviving spouse.

In the Oklahoma case, the Personal Representative was the decedent’s son by a prior marriage, the stepson of the surviving husband. It is also notable that through a Prenuptial Agreement, the surviving husband waived his right to any share of the decedent’s estate. The son, as the Personal Representative, refused to make the election required for transferring the unused exemption amount despite the fact the surviving husband offered to pay any costs and to prepare the necessary Federal Estate Tax Return. The son argued that the estate should be allowed to charge for the value of the unused exemption. He also argued that the Prenuptial Agreement prevented the surviving husband from receiving the unused exemption’s value as a share of the decedent’s estate.

The Court ruled in favor of the surviving husband, establishing several interesting points. It found that the surviving husband’s right to Portability of the decedent’s unused exemption amount was a beneficial interest in the estate held independently of any rights as an heir. As such, the Prenuptial Agreement had no bearing on transferring the exemption. The Court also held that the fiduciary obligations of the Personal Representative to preserve assets of the estate applied, requiring him to preserve and transfer the decedent’s unused federal gift and estate tax exemption to the surviving spouse. Since the 2006 Prenuptial Agreement significantly pre-dated the 2010 Portability Rule, the Court determined it failed to address Portability simply because the concept was not part of the law at that time.

Every married couple should discuss the Portability election and consider how it may influence gifting choices and estate tax planning efforts. To avoid uncertainty, your estate planning documents should address the Portability election. If you have a Pre or Post Nuptial Agreement that is silent on Portability, revisiting its terms to address the issue would be wise. At Kling Law Offices, we believe making informed decisions is the key to having an estate plan that truly reflects your goals and desires. Call us today for your free consultation.