Ernie's estate is subject to federal estate tax, which is a tax on the
transfer of the estate of a deceased person. The estate tax is
calculated based on the total value of the estate and the applicable
exclusion amount, which is the amount of the estate that is exempt
from federal estate tax. Per the IRS, in 2023 the applicable exclusion
amount for federal estate tax is $12.92 million per person (adjusted
annually for inflation). This means that an individual could pass up to
$12.92 million to their heirs without any federal estate tax liability.
For married couples, the applicable exclusion amount is portable,
meaning that if one spouse does not use all of their applicable
exclusion amount, the remaining amount can be transferred to the
surviving spouse. In this case, Ernie's estate is valued at $20 million at
the time of his death, which would exceed the applicable exclusion
amount for a single individual. However, Ernie's estate could take
advantage of the marital deduction, which allows for unlimited
transfers of property between spouses without incurring estate tax.
Under the marital deduction, Wendy would be entitled to an elective
50% share of Ernie's estate, regardless of what Ernie's will says.
Therefore, if Wendy gets all of the money, there would be no federal
estate tax liability. On the other hand, if Donna gets all of the money
and Ernie's estate is valued at $20 million, Donna will likely face a
significant estate tax liability. If Donna gets all of the money, the
entire estate would be subject to estate tax, and the tax liability
would be $2.832 million ($20 million - $12.92 million exemption
amount = $7.08 million x 40%). Per the IRS the maximum estate tax
rate is 40%, that is why I used that number here.
c c If the two parties reach a settlement, the consequences will
depend on the terms of the settlement agreement. If the settlement
agreement provides for Wendy to receive less than the elective share,
she would have the right to claim the elective share under the
applicable state law. The elective share allows the surviving spouse to
receive a statutory portion of the deceased spouse's estate,
regardless of what the will says (IRS Rev. Proc. 2005-24)
c c Under Section 2010(c)(3) of the Internal Revenue Code, the
value of the elective share is included in the gross estate of the
deceased spouse for federal estate tax purposes. This means that if
Wendy were to claim the elective share and receive a portion of
Ernie's estate, the value of that portion would be included in Ernie's
gross estate for estate tax purposes. On the other hand, if Wendy
were to waive her right to claim the elective share and receive less
than her statutory share, the value of her portion would not be
included in Ernie's gross estate for estate tax purposes.
c c If Donna were to receive all of Ernie's estate, including the
elective share, the estate tax consequences would depend on the
value of Ernie's estate at the time of his death. Under the 2023 law,
the estate tax exemption amount is $12.92 million per person. Any
portion of Ernie's estate that exceeds this amount would be subject to
federal estate tax at a rate of up to 40%. However, if the value of
Ernie's estate is less than $12.92 million, no federal estate tax would
be due.
c c As a legal professional, it is important to avoid conflicts of
interest when representing clients. In this case, there is a potential for
a conflict of interest since Wendy and Donna have different interests
in Ernie's estate. Wendy wants to receive the elective share of 50% of
the estate, while Donna wants to receive all of Ernie's assets as
provided in his handwritten will. According to Rule 1.7 of the
American Bar Association (ABA) Model Rules of Professional
Conduct, a lawyer shall not represent a client if the representation
involves a concurrent conflict of interest. However, an exception can
be made if the lawyer reasonably believes that they can represent
each client competently and diligently, the representation is not
prohibited by law, and each client provides informed consent in
writing. Therefore, before representing both Wendy and Donna, the
lawyer must inform them of the potential for a conflict of interest and
obtain their informed consent in writing. The lawyer should also take
steps to ensure that they can represent each client competently and
diligently without compromising their duty to either client.
c c The alternative valuation date allows the estate to value assets
as of six months after the decedent's death rather than the date of
death. This option is available to the executor of the estate, and if the
election is made, all assets in the estate must be valued as of the
alternative valuation date. The alternative valuation date is not
available if the estate is valued at less than the date of death value.
Here, the value of Ernie's estate as of his date of death was $20
million, but due to the drop in oil prices, the value of his estate six
months later was only $10 million. If the executor of Ernie's estate
made the election to use the alternative valuation date, the estate tax
consequences for Wendy and Donna would change significantly.
Assuming the estate is subject to the federal estate tax, the estate tax
rate in 2023 for estates valued at over $10 million is 40% (IRC section
2001(c)). If the estate is valued at $20 million, the federal estate tax
due would be a few million. However, if the estate is valued at $10
million as of the alternative valuation date, the federal estate tax due
would be $0.
Sources
Americanbar.org. (n.d.). Retrieved April 24, 2023, from
https://www.americanbar.org/groups/professional_responsibility/pu
blications/model_rules_of_professional_conduct/rule_1_7_conflict_of
_interest_current_clients/
Estate tax. Internal Revenue Service. (n.d.). Retrieved April 24, 2023,
from https://www.irs.gov/businesses/small-businesses-self-
employed/estate-tax
Part III administrative, procedural, and Miscellaneous - IRS Rev. Proc.
2005-24. (n.d.). Retrieved April 24, 2023, from
https://www.irs.gov/pub/irs-drop/rp-21-24.pdf
Legal Information Institute. (n.d.). 26 U.S. Code § 2010 - unified credit
against estate tax. Legal Information Institute. Retrieved April 24,
2023, from https://www.law.cornell.edu/uscode/text/26/2010
Legal Information Institute. (n.d.). 26 U.S. Code § 2001 - imposition and
rate of tax. Legal Information Institute. Retrieved April 24, 2023, from
https://www.law.cornell.edu/uscode/text/26/2001
