The (Po)Seiden Adventure

The early ‘70s saw a spate of so-called “disaster movies,” which involved burning skyscrapers, dysfunctional airports and, perhaps the most memorable of all, a cruise ship hit by a mammoth rogue wave that turned the ship over, forcing the passengers to make their way up to the hull.

For aficionados of disaster films, the “Poseidon Adventure” is perhaps the best disaster film of all.  The bureaucrats at the New York Department of Taxation and Finance may well have felt the same topsy-turvy sensation when they learned of the decision in Matter of Seiden.  Seiden was a New York County Surrogate’s Court case in which the Surrogate held that a marital trust was not subject to New York State estate tax at the death of the surviving spouse.

Some background: the marital deduction is actually a misnomer.  A trust that qualifies for the marital deduction merely defers tax until the death of the surviving spouse.  Having includability in the survivor’s estate is not necessarily a bad thing, however.  Because the assets are includable, they receive a change in basis to their value for estate tax purposes.  Generally, this results in a step-up in basis, which eliminates the built-in capital gain in the assets between the deaths of the spouses.

In Seiden, the estate argued that because the first spouse died in 2010, when there was no federal estate tax, a marital trust was not subject to New York State estate tax at the survivor’s death.  The argument was that no estate tax, no marital deduction and, therefore, no includability.  The Surrogate accepted the argument.  There is no record that the decision has been appealed.

The implications of Seiden extend beyond those who died in 2010.  In many instances, there was no need to elect the marital deduction other than for New York State estate tax purposes owing to the amount of the federal exemption against the estate tax.  Thus, an estate is poised to repudiate the federal marital deduction, with the result that there is no includability.

It is perhaps easy to overstate the significance of Seiden.  In many instances, the increase in basis, with the attendant capital gain savings at some point in the future, will exceed the New York State estate tax payable.  Nonetheless, in some instances, owing to modest appreciation or investment reversals, the basis issue will be irrelevant, and thus some savings can be achieved by claiming that the marital deduction at the first death was unnecessary.

Thus, it is one more item to put on the checklist for the legal representative of the surviving spouse’s estate.

The time for taking advantage of Seiden may be short-lived, however.  A section of the Governor Cuomo’s Fiscal Year 2020 Executive Budget proposes to change §955(c) of the Tax Law to require that an executor elect the marital deduction when no federal estate tax return is required to be filed.  [See Part F, §3 of the Revenue Bill, found under “FY 2020 Article VII Bills,].  Under the bill, the change would be effective as to estates of decedents dying on or after April 1, 2019.

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