Marital Sharing of Transfer Tax Exemptions

By Ryan, Kerry A. | Boston College Law Review, January 1, 2016 | Go to article overview

Marital Sharing of Transfer Tax Exemptions


Ryan, Kerry A., Boston College Law Review


INTRODUCTION

This Symposium celebrating the one-hundredth anniversary of the estate tax provides an opportunity to reflect on where the law has been and where it may be heading. Accordingly, this Article analyzes portability and its antecedents (marital deduction and gift-splitting) in order to distill a positive account of the transfer tax exemptions of married persons.1 This Article argues that the move to portability, justified largely on simplification grounds, may signal a more fundamental change in the nature of spousal exemption equivalents. The Article then considers the contours of the law with full realization of this new spousal exemption conception. In more colloquial terms, the goal of this piece is to describe the proverbial can of worms, open up the lid, and peek inside. The author plans to unpack the normative underpinnings of this account in future work.

Prior to 2010, the only way that one spouse could access the benefit of the other spouse's effective exemption amount was via a prior marital deduction transfer, actual or deemed (per a gift-splitting election). With the enactment of portability, Congress decoupled tax-free availability of a decedent spouse's applicable exclusion amount from the requirement of a prior shift in the tax base to that spouse. All that is required is an election by the decedent spouse, via the executor, to share the decedent's unused exemption equivalent with the surviving spouse. Evaluation of this progression in the law suggests that Congress may be moving towards a model of elective sharing of unified credits between spouses, during life or at death.

Part I of this Article provides a brief history of the transfer taxation of married couples.2 Part II details the evolution in how spouses access or share each other's unified credits.3 Part III articulates a paradigm of marital sharing of transfer tax exemptions and envisions its operationalization.4 Lastly, Part IV raises several potential implications of adoption of such a regime.5

I. BRIEF HISTORY OF TRANSFER TAXATION OF MARRIED COUPLES

This Part provides a brief legislative history of the federal estate and gifttaxes focusing primarily on those transfer tax provisions specifically aimed at married couples. The Revenue Act of 19166 imposed an excise tax on the transfer of a decedent's estate at death. A modestly progressive rate schedule applied to the net estate.7 Concerned about the erosion of the estate tax base presented by inter vivos gifts, Congress adopted the first federal gifttax in 1924 with its own separate tax base, rates, and exemption amounts.8 In 1976, Congress integrated the two taxes by establishing a unitary rate schedule cumulatively applied to all gratuitous transfers of property during life or at death, and a single unified credit, which was equal to the tax saved on exempting the applicable exclusion amount ("AEA") from taxation, in lieu of separate exemptions under each tax.9

Prior to 1942, no special tax provisions applied to transfers of property between spouses or transfers from one spouse to a non-spouse beneficiary. The U.S. Treasury occasionally pushed Congress to equalize the taxation of married individuals in community property and common law states.10 State community property law automatically treated each spouse as owning one half of any community property. This was advantageous from a transfer tax perspective because it included only half the value of the marital property in the estate of the first spouse to die.11 The Revenue Act of 194212 ("the 1942 Act") attempted to bring uniformity by rejecting state law as the touchstone for estate and gifttaxation in community property states, and instead applied common law notions of ownership and control to community property transferors.13

Dissatisfaction with the 1942 Act from the community property states led to a repeal of the 1942 gift and estate tax revisions.14 In the Revenue Act of 1948,15 Congress implemented a regime that attempted to produce equal transfer tax results in common law states and community property jurisdictions. …

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