I am writing to all of my clients and also their other attorneys, accountants and financial planners. This is a very important update that could apply to many clients.
Your job is to look at your Will, or, if you have a living Trust, to look at it. Does your Will or Trust have a “Marital Trust” or “QTIP Trust” in it? Or does it refer to the “marital deduction” anywhere in it?
If so, you need to be aware of the decision in the Estate of Billy S. Rowland v. Commissioner, T. C. Memo. 2025-76 (2025). This case dealt with an estate tax return on the estate of the surviving spouse and the attempt by his executor to use the “decedent’s unused estate exemption” or “DSUE” of his predeceased spouse. The DSUE was critically important to saving estate taxes on his estate, but the attempt to use it failed.
The problem was caused by regulations that allow for a shorter or simplified way of filling out a federal estate tax return (Form 706) for the surviving spouse to get the unused estate tax exemption of the predeceased spouse. There are situations when the simplified method can’t be used. This case involved one of those exceptions, preventing the use of the claimed DSUE. As a result, Billy’s executor had no DSUE to use, which cost Billy’s estate a significant amount.
Here is the catch: the simplified procedure is usable unless the amounts passing to beneficiaries other than the spouse or charities are somehow affected by the gifts to the spouse and charities.
In other words, if your Will or Trust gives something like “the marital deduction amount” to a marital trust, or QTIP, or gives amounts or percentages to charities, and then gives some or all of the rest of your assets to non-marital and non-charitable beneficiaries, the simplified method is unavailable. More importantly, there is no grace for a good faith attempt or substantial compliance. The executor must prepare and file a “full-blown” estate tax return in order for the surviving spouse to get the DSUE.
If you are a client, what should you do? Pull out your Will or Trust, and make an appointment to talk to us. A phone call may be sufficient to find out where you stand and if the Rowland case affects you and your planning. If it looks like your planning is impacted, we’ll schedule a meeting to talk about what to do and how to rearrange your plan.
If you are an attorney, accountant or financial planner, you need to be aware of this as well.
For those assisting clients in preparing and filing estate tax returns, be sure to look at the will or trust of the decedent to determine if the amounts passing to non-marital or non-charitable beneficiaries is in any way impacted by what passes to the surviving spouse or a charity. If so, then the simplified method cannot be used to claim DSUE. Instead, the return must be as complete with appraisals and other information as one would be for a taxable estate.
For attorneys drafting estate planning documents, you need to keep in mind that one of the typical choices in formula clauses is to fund the martial or QTIP trust first, and the remainder passed to the bypass or family trust or otherwise. Consideration should be given to reversing that, and funding the bypass or family trust first. If gifts are to be given to a charity, consider making them out of the residue rather that out of pre-residuary funds.
Please reply to this if you have other observations or suggestions.