Avoiding Costly Estate Tax for a Simultaneous Death

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.

Winner of the 2016 Heckerling Institute on Estate Planning Tax Court Opinion Writing Contest

 

This blog post is about my recent winning entry in the 2016 Heckerling Institute on Estate Planning Tax Court Opinion writing contest. This is a contest Richard Covey (who is with the New York law firm Carter, Ledyard & Milburn, LLP and a founding member of Heckerling) presented to the Heckerling participants.

This contest centered on an extremely interesting, and now in my evolving view, broadly relevant, estate tax planning question dealing with the QTIP marital deduction.

More particularly, this QTIP question is good food for thought for a broad number of married couples, especially whose net worth hovers around the combined (current) $10.9 million federal exemption value.   For this blog post I am not making a recommendation one way or the other about whether clients apply this QTIP planning.

I include the following two links for readers who wish to delve further into this QTIP question and my hypothetical Tax Court Opinion in response to the contest.

The first link is yesterday’s newsletter in the Leimberg Information Services newsletter service. Click here for a link to the newsletter.

Click this second link here for my contest Tax Court opinion.

You are welcome, and I have no objection, to anyone forwarding or printing this blog post and these two links for other readers.  Also email me if you have any thoughts or comments that further shed light on this QTIP question.  Here also is the link to the Leimberg Information Services website.

 

 

 

 

 

Canada – We Are On Our Way. An Income Tax-Based Estate System

This is a point I harp on frequently, most recently in my June 18, 2015 blog post.   Click here for my earlier post,   That is, if you are married make sure your core estate planning documents include a QTIP marital trust and a QTIPable by-pass trust for your surviving spouse.  Do not use the well-worn credit shelter trust.

My primary point is for you to read the related income tax provisions in the 300-page February 2015 “General Explanation of the Administration’s Fiscal Year 2016 Revenue Proposals” (click here to see it).  The specific proposal I address is on page 156.  It, in my view, gives us yet another writing-on-the-wall that the bulk of us will at some point face an income tax at death on our date-of-death accrued gains rather than paying an estate tax.  In other words, we will face an estate situation in large part similar to the income tax / estate system in Canada.

This is writing-on-the-wall, as I do not see this proposal being implemented in the immediately foreseeable future.  But, it is coming.

For example, assume a person owns 1,000 shares of Apple stock at death with a cost basis of $50 per share. The Apple stock is now worth $120 per share on the date of the person’s death.  In this example that person’s estate will pay income tax on the $70 capital gain rather than an estate tax [the $70 per share gain is the $120 per share current value less the $50 cost basis].  Keep in mind this is income tax on the gain even if the estate does not sell the stock.

There also is an important exception in this 2016 income tax-gain revenue proposal. This income tax gain requirement will not apply at the death of a spouse to the extent the property passes to the surviving spouse (or to a charity).

This means the best and most flexible degree of foresight for your core estate planning is to include a QTIP marital trust and a QTIPable by-pass trust that most likely will be treated favorably under this surviving spouse exception.   I am willing to bet the farm that the tried-and-true credit shelter trust will not fall within this exception.

From a planning perspective I also see no downside to the use of the QTIP trust approach, even if I end up wrong about this move toward Canada.