I ran into this estate tax question a few days ago that I found interesting. But not interesting so dramatically or spectacular to warrant a long law review article or other long-winded commentary. Nonetheless, many readers might find this brief summary useful.
This question centers on maximizing estate tax savings. Specifically, dealing with portability of the estate tax exemption for a married couple, and how the unlikely event of both spouses’ simultaneous deaths can adversely affect portability.
As a backdrop, a fundamental checklist item for any married-couple estate planning is purposely to preserve the use of each spouse’s full estate exemption. As I illustrate by example below, lack of planning for a simultaneous death can cause a loss of portability and a surprise increase in estate tax.
Point One. All married couples’ Wills need to include an express provision governing how the spouses’ estates operate in the (unlikely) event of a simultaneous death. For example, both spouses die in a plane crash. This express provision must be included in simple and complex Wills. In all Wills, in my opinion.
Point Two. If the Will does not include a simultaneous death provision, then state law generally by default applies. For example, Georgia law (like many states) provides that a simultaneous death is treated as though each person survived one another. Georgia’s default statutory law is the “Uniform Simultaneous Death Act in Georgia”, at O.C.G.A. § 53-10-1 et seq.
This “survived one another” is a brain-twister and might provide some level of novel, mental gymnastics over drinks. But, its operative essence – for example with a married couple – is that neither spouse is treated as receiving any of the estate from the other spouse. Their Wills are then applied to the next level of beneficiaries. Their children in many cases.
Point Three. You can google and find various tax commentators who make the point that the federal portability tax regulations do not address simultaneous death. This is correct. And another reason a Will must include its own simultaneous death provision, so as to trump the above state law “survived one another” result and insulate against the absence of clarity under the portability tax regulations.
Also, simply put, a state law “survived one another” result will cause a married couple to lose the benefit of portability. You can play around with the math and this concept, etc. And, below is an example:
Assume a married couple H and W die in a common disaster. W has $7.1 million of assets. H has $1.8 million. Combined total $8.9 million. H and W are both under the combined $10.98 million estate exemption amount. Ideally no estate tax.
But, in this example H and W have no provision in their Wills otherwise spelling-out that one spouse is deemed to have predeceased the other spouse in the event of a simultaneous death. Absent this Will provision, state law applies to H and W in this example so that H and W by default are treated as each surviving one another.
H and W in this example have disastrous estate tax planning. They will pay $644,000 estate tax in W’s estate even though their estate values are below their combined $10.98 million estate exemption amount. [I do not compute any potential state death tax in this example.]
This estate tax exposure is because W’s $7.1 million estate value exceeds her $5.49 million exemption. Triggering W’s estate tax of $644,000 [40% of $7.1 million less W’s $5.49 million exemption = $644,000 tax].
Why this costly result?
H and W lose portability in this example. Under default state law they are treated as each surviving one another. No property from one spouse passes to the other spouse. Also, in this example H’s unused estate exemption does not pass to W. Here there is a complete loss of H’s portability for his unused exemption. [H has a $1.8 million estate less than his available $5.49 million exemption.]
Point Four. Each Will for a married couple must include a presumption of death provision in the unlikely event of a simultaneous death. In some cases, practitioners opt for designating the spouse with the greater estate value as being the spouse presumed to die first.
But, as to the specifics of this simultaneous-death provision, I frankly see no need in every case for portability purposes to worry which spouse has (or might have) the greater assets. Rather, just make sure – likely in most all cases – you designate one of the spouses (whether H or W) as being the spouse expressly deemed to predecease the other spouse in the event of a simultaneous death.