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.
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)
d d d 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.
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.
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.
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/publications/model_rules_of_prof
essional_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
