Wendy and Donna would like to know the tax implication is a) Wendy gets all the money and b) if
Donna gets all the money, under the 2018 law. Let us start by stating some relevant 2018 estate law
facts, on this year the basic exclusion amount to be applied against the estate tax was $11,180,000
(IRC Section 2010(c)(2)). The 2018 estate tax consisted of 12 brackets starting with an 18% tax on
taxable estates in the $0-$10,000 and the highest was a 40% tax on taxable estates over $1,000,000.
(IRC Section 2010(c)) Estate tax applies progressively.
If the $20 million goes to Wendy, there should not be any tax consequences as per IRC section (IRC
Section 2056(a)) she would be benefiting from the unlimited estate tax marital deduction. This
allows one marriage partner to transfer an unlimited amount of assets to his or her spouse without
incurring a tax.
If the $20 million goes to Donna, there should be real tax implications. As the daughter, she does
not benefit of any unlimited estate tax deduction. However, the unused unified credit of $11.18
million would be applied against the estate and she would have to pay estate taxes on the remaining
estate of $8.82 million. The approximate estate tax liability would be $3,473,800.
I believe the consequences if the two parties reach a settlement would depend on the terms of such
settlement. For simplicity let us assume both parties agree to respect the surviving spouse elective
50% share of the estate and Donna keeps the other 50%. In this case, there would not be any estate
tax consequences for either Wendy or Donna. As explained before Wendy has unlimited estate tax
marital deduction, so there should not be any estate tax liability of her share. In the case of Donna,
she would be receiving $10 million (50% share of the estate), this figure happens to be under the
$11.18 million of unused unified credit that Ernie had, so she would not be affected by any estate
tax liability.
This is an interesting question. I do not believe I would have a conflict of interest in representing
both Wendy and Donna as clients as I would not have any personal gain by favouring either or.
Through a professional and ethical lens, I do not think it would be a good decision to represent both
parties as to focus my resources solely in the Favor of only one client.
This was a very challenging question for me, it generated more and more questions as I looked for
an answer. Questions regarding how time affects the limited supply of oil, thus altering the value of
the oil wells, also what does “working interest” mean in this scenario? What percentage of the
estate was “working interest”? etc I have no answers to those questions, so I am basing this
argument on IRC Section 2032 – Alternate valuation, more specifically on section 2032 (a)(2):
“In the case of property not distributed, sold, exchanged, or otherwise disposed of, within 6 months
after the decedent’s death such property shall be valued as of the date 6 months after the
decedent’s death.”
Based on this section the estate valuation after the 6 months (on 02/2018) can be elected by the
executor, if the election decreases the value of the gross estate and estate tax, (IRC section 2032(c))
which are requirements met in this case.
The alternate valuation under section 2032 should decrease any possible tax liability for Wendy and
Donna, as we have seen before Wendy has no estate tax liability. But Donna would see a huge
benefit (from a tax perspective) as the new valuation is under the unified life time credit thus there
is no taxable estate.
Since Wendy is the spouse, she does not get taxed on any of Ernie's estate. This is due to the
unlimited spouse deduction which is outlined in section 2056 of the IRC. If his daughter Donna was
to inherit all the money, she would be subject to the estate tax. Upon reading through the text and
code, I had a major understanding of this topic. However, I am a bit confused on the wording of the
question and maybe either Professor Mahathey or someone can help clarify. If we are using the
2018 tax law, does that mean we use 2017's filing threshold for the unified credit or does that mean
we use 2018? The outcome of the tax will vary greatly depending on which year we are supposed to
use since the Tax Cuts and Jobs Act of 2017 has more than doubled the tax exemption from 5.49
million to 11.18 million. I guess to cover my bases I will calculate the taxes for both years.
2017's estate tax: $5,864,000
2018's estate tax: $3,528,000
The consequences if they both decide to settle will depend on the terms of their settlement. It does
not matter what conclusion they come up with for Wendy's case. Whatever amount they would
agree upon, she will not be taxed because the spousal deduction is unlimited. Since it was stated
that both Donna and Wendy are hostile towards each other, I do not think they would come to an
agreement.
Yes, absolutely there is a conflict of interest in this case. Each woman feels they are entitled to the
money. If a law firm was to represent both, they would be fighting amongst themselves. The only
way that someone could represent both is if they threw the whole case out and agreed upon a
settlement.
If the estate was valued at 10,000,000 again Wendy's inheritance would not be subject to estate tax
because she is the wife. Now this new valuation could change the taxes owed by Donna if she were
to inherit it. Again, I will post both 2017 and 2018 since I was unclear as to which amount to use:
2017's estate tax: $1,804,000
2018's estate tax: $0
If we use the 2018 exemption threshold, Donna would not be subject to any estate taxes. This is
because the entire amount of 10 million is below the 11.18 million thresholds.
Sources:
I.R.C. § 2056
Frisch, David. “Council Post: How the Tax Cuts and Jobs Act of 2017 Affects Estate Taxes.” Forbes,
Forbes Magazine, 27 June 2018,
https://www.forbes.com/sites/forbesfinancecouncil/2018/06/27/how-the-tax-cuts-and-jobs-act-of-
2017-affects-estate-taxes/?sh=3d010cef6cf9.
