The Curious Case of Dr. Jekyll and the Estate Tax Marital Deduction: Should Prenuptial Agreements Alter the Relationship?
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The tax code bestows various benefits upon married taxpayers based on the presumption that married individuals form a single economic unit and should be taxed accordingly. This article explores this presumption in cases where the married individuals’ interactions are governed by a prenuptial agreement. Should married taxpayers be treated as economic units when they have entered an agreement allowing them to deviate from the state law burdens of marriage otherwise imposed? This article explores this question in the context of the estate tax marital deduction, which allows a 100% deduction for the value of property passing from a decedent to a surviving spouse, so long as the property passes outright or in a statute sanctioned form to the decedent’s surviving spouse. The discussion requires an exploration of the historical origins of the estate tax marital deduction and a survey of common terms found in prenuptial agreements. A simple declaration that the tax benefits should be denied when the burdens of marriage are sufficiently avoided begs the questions: (1) what level of deviation from state law imposed burdens should trigger denial of the 100% estate tax marital deduction, and (2) if denied, should the predecessor to the 100% deduction be employed, or should some other deduction regime be created for this scenario? Because of the inherent complexities evinced by these follow-up questions, the article concludes that, although policy arguments may support denying the deduction in certain situations, practical considerations demand that the tax benefits not be impacted by the presence of a prenuptial agreement.