There was a recent case  out of Oklahoma that came close to answering a question many advisors have wondered about since 2010, whether portability is an asset. The reported decision is from the Oklahoma Supreme Court, Estate of Anne S. Vose v Lee.2017 WL 167587 (Okla. 2017)

The facts were pretty predictable that brought this question to a head. Husband and Wife entered into a prenuptial agreement. Husband waived all rights to Wife’s estate (elective rights, statutory allowances, intestacy rights, the right to be personal representative of the deceased spouse’s probate estate, and a release and waiver of all claims, i.e. “waive, discharge and release any and all claims which I may acquire in or to the separate property, income, assets and liabilities… by reason of our marriage.”  Wife dies.  Wife’s Son from her first marriage becomes the PR of her estate. Surprise! Son does not like step-father. Son refuses to file a Form 706. Son also refuses to elect portability. Husband files motion to compel the PR to file a Form  706 and to timely make a portability election. Son responds that Husband waived all rights in Wife’s estate under Wife’s prenuptial agreement. Trial court, and Supreme Court, both compel the filing of the Form 706 (at Husband’s expense) and direct the PR’s  to make the portability election.

To get to the ultimate question, the Supreme Court had to navigate several preliminary legal questions, to find: (i) the probate court had subject matter jurisdiction over the portability election; (ii) the federal law that authorizes portability did not preempt state law on this question-states could pass laws that pertain to the portability election; (iii) Husband had standing in the estate, despite all of his waivers in the prenuptial agreement- he was deemed to have a “potential interest in part of Decedent’s estate under the control of the PR;” and (iv) the change in the law that created portability was not a foreseeable change in circumstances at the time the prenuptial agreement was signed (5 years earlier) so the Court was not completely bound by the terms of the prenuptial agreement- portability was not a foreseeable change in the law that the parties could have contemplated when they signed their prenuptial agreement.

The Court was careful not to call the portability right  an asset per se. But it indirectly concluded that Husband’s “potential interest” was equivalent to an asset.  Selected quotes follow:

  • “[Surviving Spouse] may have a pecuniary interest as the surviving spouse in the portability of the DSUE, independent of his ability to take as an heir.”
  • “The portable DSUE is no simple property acquired by one party over the course of the marriage according to existing laws in effect when the [prenuptial] agreement was made.”
  • “Since the DSUE [amount] is valuable only to the [Surviving Spouse] while at the same time being an estate asset under the PR’s complete control, he [the PR] should be allowed to demand consideration from [the Surviving Spouse] in exchange for making the election.”
  • “The district [here the probate] court, after hearing expert testimony and considering evidence, evidently determined that any risk to the estate was outweighed by [the Personal Representative’s] fiduciary obligation to preserve the assets of the estate and safeguard [Surviving Spouse’s] interest in the DSUE amount.

Take-aways from this decision are:

  1. A surviving spouse is viewed as holding a potential interest in the deceased spouse’s estate, regardless of any prior waiver of ‘any and all rights or claims’ to that estate. [More recent prenuptial agreements that address portability may lead to a different outcome.]
  2. While not expressly called an asset or a property interest per se, the right to claim a DSUE is an interest with value. The DSUE is not available to pay estate expenses, the decedent’s debts, or to fund a legacy, so it does not appear to be an ‘asset of the estate’ for those purposes.  But the DSUE is considered to be an interest held by the surviving spouse under the PR’s control.
  3. Apparently in Oklahoma a Personal Representative has a fiduciary obligation to safeguard the surviving spouse’s interest in the DSUE amount, even when the surviving spouse is not technically an interested party in the probate estate.

Unanswered questions:

  1. If the DSUE is ultimately treated as an asset of the decedent’s estate, can it be sold by the PR to the surviving spouse?
  2. The Court only ordered the surviving spouse in Vose to pay for the cost to prepare and file the Form 706 on which the portability election is made. But is that enough when the election of portability of the DSUE amount will extend the audit period for the deceased spouse’s estate, arguably exposing the decedent’s estate (and its beneficiaries) to a IRS audit long into the future?
  3. Does the PR hold the DSUE as a ‘constructive trustee’ for the benefit of the surviving spouse?  The Court suggests that the DSUE can be sold to the surviving spouse; thus  it would seem then that the equitable remedy of constructive trust does not apply if the PR can ‘sell’ it, implying the PR owns the DSUE, not the surviving spouse.
  4. But at the same time the Court imposes a fiduciary duty on the PR to preserve the DSUE for the surviving spouse, implying that there is some inchoate right to claim the DSUE by the surviving spouse such that it must be preserved.
  5. How will the DSUE to be valued if it is treated as an asset when,  as the Court pointed out, it is ‘valuable only to the surviving spouse?’ Fair market value under the tax code is based upon an objective ‘willing buy and willing seller’ test. Yet the DSUE is only valuable to the surviving spouse. How will its value, and the price to be paid for it, be negotiated by the PR and the surviving spouse? What if they reach an impasse on the price the surviving spouse is to pay, yet the PR is told he/she has a fiduciary obligation to preserve the DSUE for the benefit of the party with whom the PR is expected to negotiate its value.
  6. If the DSUE has value, will the PR be under a fiduciary obligation to negotiate the highest value/price possible in order to enhance the value of the decedent’s estate for the benefit of the estate’s beneficiaries? Will that price paid fall solely to the residuary beneficiaries to the exclusion of other devisees and legatees under the Will?
  7. Can a PR be relieved of the fiduciary duty to ‘sell’ the DSUE to the surviving spouse under the deceased spouse’s Will or Trust?

For future estate plans the best approach with all of these lingering unanswered questions is to expressly address the portability opportunity in prenuptial agreements [maybe adopt postnuptial agreements if existing prenuptial agreements have to be amended to address the portability opportunity], and in the decedent’s Will or Trust. If the decision is made to direct the PR to file a Form 706 and elect portability for the exclusive benefit of the surviving spouse, more than just the cost to prepare and file the Form 706 should be shifted onto the surviving spouse. Since the portability election will extend the statute of limitations for audits of the decedent’s estate, then the estates’ anticipated costs and expenses that arise from future IRS audits should also be shifted onto the surviving spouse as an additional ‘cost’ to make the portability election.

Maybe the question if portability will become moot if Congress repeals the federal estate tax. Maybe portability will remain relevant if the federal estate tax is repealed but the federal gift tax is retained. Maybe an enterprising IRS agent will  argue that a deceased spouse’s estate holds a phantom asset called the ‘right to sell a DSUE’. Maybe creditors of an insolvent decedent’s estate will petition the probate court to compel the PR to sell the DSUE to a surviving spouse in order to enhance the decedent’s estate to pay claims.

Maybe I should just stop now with the rhetorical questions!