Prenuptial Agreements and Portability

Quite often a prenuptial agreement is recommended when a couple is planning to get married, and if it is a second marriage for one or both. The agreement defines the interest each has, or does not have, in the property of the other. Prenuptial agreements are also recommended when one of the spouses is wealthier than the other. Prenuptial agreements can deal with numerous issues, and a new one is the issue of “portability”, the ability of a surviving spouse to use any estate or gift tax exemption not used at the first spouse’s death, by filing an estate tax return within nine months of the death.

The American Taxpayer Relief Act of 2012 (ATRA) made portability permanent, clarifying the ability of a married couple to share their individual estate tax exemptions. As of 2014, the estate and gift tax exemption amount is $5.34 million per person, or $10.68 million for a married couple. The Supreme Court’s 2013 decision in Windsor v. U.S. expanded that portability to same-sex married couples. An estate planning attorney should be involved in drafting the prenuptial agreement, because it is important to include instructions that survivor as the executor of the estate should elect portability, if is a beneficial step to take.

But what happens if this is a second marriage, and one spouse has children from a prior marriage. Each spouse names the other as executor, and the spouse with the children intends for the estate to pass to the children after the death of the survivor. It may be in the interest of the deceased spouse’s children for the survivor-executor to elect portability to minimize the estate tax paid on the death of the survivor. But, throw in a little bad blood between the surviving spouse and the children of the deceased spouse... The survivor, in this example, is not particularly concerned about how much of an estate tax bite IRS takes from the children’s inheritance, and besides, tax preparers charge a fortune for that pesky Form 706 Estate Tax Return. A carefully prepared prenuptial agreement would have dealt with that issue and prevented conflict from arising between the survivor and the children.