What Is Rev Proc 64-19 and the Marital Deduction?

Revenue Procedure 64-19 is an Internal Revenue Service (IRS) rule that ensures fairness in how assets are valued when transferred to a surviving spouse to qualify for the federal estate tax marital deduction. It applies when a will or trust leaves a specific dollar amount to a spouse but allows the executor to satisfy the gift with non-cash assets, like stocks or real estate. The procedure provides a framework to prevent executors from using assets that have decreased in value to fund the spouse’s share, which would unfairly reduce what the spouse receives.

The Marital Deduction and Pecuniary Bequests

The federal estate tax system includes the marital deduction, which allows an individual to transfer an unlimited amount of assets to their surviving spouse without generating estate tax. The purpose of this deduction is to treat a married couple as a single economic unit, deferring any potential estate tax until the surviving spouse’s death.

A common estate planning tool is the “pecuniary bequest,” which is a gift of a fixed-dollar amount. For example, a will might state, “I give the sum of $1,000,000 to my surviving spouse.” A complication arises when the will permits the executor to satisfy this monetary gift “in kind,” meaning with non-cash assets like securities or property.

The problem Rev. Proc. 64-19 addresses involves the timing of asset valuation. If an executor could satisfy a $1,000,000 pecuniary bequest using assets valued as of the date of the decedent’s death, a potential for manipulation existed. For instance, if a stock portfolio was worth $1,000,000 on the date of death but had declined to $700,000 by the time it was distributed, the spouse would receive less than the intended amount.

This scenario would allow the estate to receive a $1,000,000 marital deduction while the surviving spouse received assets worth significantly less. The depreciated assets would reduce the surviving spouse’s future estate, while appreciated assets could be directed to other beneficiaries. The IRS viewed this as a tax avoidance strategy that undermined the principle of the marital deduction.

Permitted Funding Formulas

Revenue Procedure 64-19 provides two approved funding methods to prevent an executor from using depreciated assets to fund the spouse’s share while allocating appreciated assets to other heirs.

One approved method is the “true worth” or “date of distribution” formula. Under this approach, assets used to satisfy the pecuniary bequest must be valued at their fair market value on the date they are distributed to the surviving spouse. This ensures the spouse receives assets worth the specified dollar amount at the time of transfer.

For a $500,000 bequest, the executor must transfer assets collectively worth $500,000 on the day of the transfer. If the estate’s assets have grown in value, the estate must recognize a capital gain on the appreciated assets used to fund the bequest. If the assets have declined, the estate may recognize a capital loss.

The second method is the “fairly representative” formula. This approach requires that assets distributed to the spouse be representative of the overall appreciation and depreciation of all assets available for distribution. The assets are valued at their date-of-death values for funding, but the selection must reflect the portfolio’s overall performance.

For instance, if an estate’s assets appreciated by 20% between the date of death and distribution, the assets transferred to the spouse must also reflect this 20% growth. This means the spouse shares proportionately in the estate’s gains or losses. This formula avoids triggering capital gains at the estate level upon funding.

Consequences of Non-Compliance

Failure to structure a pecuniary bequest according to Rev. Proc. 64-19 carries a significant penalty. If a will or trust allows an executor to fund a spousal bequest with assets valued at their date-of-death values without requiring a “true worth” or “fairly representative” distribution, the IRS can disallow the marital deduction.

Disallowing the marital deduction means the value of the assets intended for the spouse becomes subject to federal estate tax. This can create a substantial tax liability, with rates as high as 40%, which reduces the total assets available for all beneficiaries.

Language that complies with Rev. Proc. 64-19 is now standard in estate planning documents that use pecuniary marital formulas. Attorneys include provisions mandating one of the approved funding methods. This ensures the estate can claim the marital deduction and avoid a costly tax assessment.