Pre-erta Formula Marital Deductions
| Jurisdiction | United States,Federal |
| Citation | Vol. 17 No. 9 Pg. 1749 |
| Pages | 1749 |
| Publication year | 1988 |
1988, September, Pg. 1749. Pre-ERTA Formula Marital Deductions
The Economic Recovery Tax Act of 1981 ("ERTA")(fn1) made a drastic change in the federal system of taxing the estates of married couples. ERTA provided, under § 2056(a) of the Internal Revenue Code of 1986 as amended ("Code"), for an unlimited marital deduction for property passing from a deceased spouse to the surviving spouse. Prior to ERTA, the maximum marital deduction was limited by § 2056(c) to the larger of one-half of the estate or $250,000.
The ERTA change was designed to avoid a potential "widow's tax," taxation of part of the estate upon the death of the first spouse, thereby reducing the amount available for the benefit of the surviving spouse. Various estate planning methods had been devised by lawyers to reduce or avoid the widow's tax. Estate tax law changes were made by ERTA, including the availability of an unlimited marital deduction, and estate planning changed accordingly.
Congress was aware when it passed ERTA that many wills probably had been drafted which provided for the surviving spouse to receive the maximum amount that would qualify for the marital deduction. Congress perceived the following problem: The decedent may have only wanted to leave his or her spouse an amount equal to the maximum marital deduction in effect at the time the decedent drafted the will. Such a decedent may have been satisfied with leaving the surviving spouse the larger of one-half of the estate or $250,000, with the remainder to others. If a pre-ERTA maximum marital deduction bequest was given effect using post-ERTA law, the surviving spouse could receive the entire estate, rather than the intended amount.
Because of this possibility of frustrating the true intent of the decedent, Congress included in § 403(e)(3) of ERTA a narrow transitional rule designed to prevent the post-ERTA unlimited marital deduction from frustrating the true intent of testators for wills or trusts drafted pre-ERTA. Section 403(e)(3) generally states that pre-ERTA bequests containing a formula "expressly providing" for the spouse to receive the maximum federal marital deduction amount will only receive this amount based upon pre-ERTA law.
The Internal Revenue Service ("Service") originally gave the transitional rule a narrow reading. In recent years, however, the Service has attempted to expand the coverage of the rule.(fn2) Such expansion would apply the transitional rule to any pre-ERTA bequest that refers to the "maximum marital deduction." If the Service's interpretation of the transitional rule is correct, then the rule would apply to many more estates than originally believed.
This article discusses the transitional rule for the pre-ERTA marital deduction, and analyzes...
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