Cal. Code Regs. tit. 18, § 13805 – California Marital Exemption or Exclusion.

(a) In General. All of the property transferred to the spouse of a decedent who died on or after January 1, 1981 is excluded from the inheritance tax, except where the spouse receives a limited power of appointment over any portion or all of the decedent's property. The spouse of a decedent who died on or after January 1, 1976 and before January 1, 1981, is entitled to a marital exclusion and the spouse of a decedent who died on or after April 26, 1950 and before January 1, 1976, is entitled to a marital exemption, either of which applies with respect to property received by the spouse from the decedent pursuant to any transfer subject to the Inheritance Tax Law equal in amount to one-half of the clear market value of the decedent's separate property. However, as to decedents who died on or after January 1, 1976 and before January 1, 1981, the exclusion will not apply with reference to separate property which has been converted from community or quasi-community property (see Revenue and Taxation Code Section 13805(b) as amended and effective January 1, 1976).
(b) Marital Exclusion as to Decedents Who Died on or after January 1, 1981. All of the property transferred to the spouse of a decedent who died on or after January 1, 1981 is excluded from inheritance tax, except that if a limited power of appointment over any portion or all of the decedent's property is given to the spouse of the decedent, the value of such property is subject to the tax. Where a limited power of appointment is given by a decedent to the decedent's spouse, the value of any interest given other than the limited power of appointment itself is excluded from the tax. For example, if a surviving spouse receives a life estate plus a general power of appointment over the remainder in one-half of the decedent's estate and a life estate plus a limited power of appointment over the remainder in the other one-half, the value of the life estate and general power of appointment in one-half of the estate and the value of the life estate in the other one-half are excluded and the value of the remainder in the one-half of the estate subject to the limited power of appointment is subject to the tax.
(c) Determination of Amount of Marital Exclusion or Exemption as to Decedents Who Died Before January 1, 1981. The exemption or exclusion requires the calculation of the following two factors the lower of which is the dollar amount allowable:
1. (1) One-half of the clear market value of the decedent's separate property, and
2. (2) The amount of property received by the surviving spouse which is not excluded (not excluded as community or quasi-community property, the insurance exclusion, etc.)
  There is no limitation on the form of transfer to the surviving spouse in order to include the transfer in the calculation of factor (2). Thus life estates are counted in determining the amount of property taken by the surviving spouse.
  As to computation of the marital exemption or exclusion involving proceeds of insurance on the life of a deceased spouse payable to the surviving spouse, see Sections 13724.1 and 13724.2.
(d) Allowance of Exclusion as to Decedents Who Died on or After January 1, 1976 and Before January 1, 1981. With reference to transfers by decedents who died on or after January 1, 1976 and before January 1, 1981, the amount determined under (c) above is excluded from the sum of net transfers subject to the Inheritance Tax Law and passing to the surviving spouse before application of the specific spousal exemption or tax rate brackets, thus reducing the amounts otherwise taxable in the higher tax rate brackets. The provisions of subdivision (c) may be illustrated by the following example:
EXAMPLE. A married person died in 1976 leaving an estate which consisted entirely of separate property having a clear market value of $150,000 to the surviving spouse. One-half of the separate property ($75,000) is excluded from the tax. The balance of $75,000 is taxable subject to the $60,000 specific exemption (Revenue and Taxation Code Section 13801). The $60,000 specific exemption is applied to the first and second rate brackets as to $50,000 and to $10,000 in the third rate bracket leaving $15,000 taxable at the third bracket rate:
$150,000--
Separate property passing to spouse
75,000--
Marital exclusion (Revenue and Taxation Code Section 13805, effective January 1, 1976)
60,000--
Specific exemption (Revenue and Taxation Code Section 13801, effective January 1, 1976)
15,000--
Taxable at 6 percent (third rate bracket)
= $900
Total Tax $900
(e) Deduction of Marital Exemption as to Decedents Who Died Prior to January 1, 1976. The marital exemption of surviving spouses of decedents who died prior to January 1, 1976, and on or after April 26, 1950 is deductible from lower tax rate brackets pursuant to Revenue and Taxation Code Section 13403 as then applicable which requires the property in excess of the exemption to be taxed in the rate brackets in which it would have been taxed had there been no exemption. These provisions may be illustrated by the following example:
EXAMPLE. A married person died in 1974 leaving an estate which consisted entirely of separate property having a clear market value of $150,000 to the surviving spouse. The marital exemption of one-half the separate property ($75,000) and the $5,000 specific exemption (Revenue and Taxation Code Section 13801 prior to January 1, 1976) are applied to the first and second rate brackets as to the first $50,000 of the total exemptions allowable. The balance of the allowable exemptions ($30,000) is applied to the third rate bracket leaving $20,000 taxable in the third rate bracket and $50,000 taxable in the fourth rate bracket:
$150,000--
Separate property passing to spouse
75,000--
Marital exemption (Revenue and Taxation Code Section 13805 prior to January 1, 1976)
5,000--
Specific exemption (Revenue and Taxation Code Section 13801 prior to January 1, 1976)
20,000--
Taxable at 6% (third rate bracket) =
$1,200
50,000--
Taxable at 8% (fourth rate bracket) =
4,000
Total Tax $5,200
(f) Exclusion Inapplicable to Separate Property Converted from Community or Quasi-Community Property.
1. (1) For the purpose of Revenue and Taxation Code Section 13805(b) applicable to decedents who died on or after January 1, 1976 and before January 1, 1981, “conversion” includes any transaction or agreement between spouses which transforms property from community property or quasi-community property (including property subject to Probate Code Section 201.5) into a separate property status other than by gift from one spouse to another. The following are examples of “converted” property:
  1. (A) A partition or equal division of community property or quasi-community property (whether by undivided shares or by division in the agreement so that each spouse receives definite assets of total equal value);
  2. (B) A transfer of property from community property or quasi-community property into another form of co-ownership, wherein the surviving spouse can claim by contribution (other than under Revenue and Taxation Code Section 13672); or otherwise that the property is other than community property or quasi-community property;
  3. (C) An agreement (either before or after marriage) that future earnings or acquisitions which would otherwise be community property or quasi-community property shall be shared by the spouses as their separate property;
  4. (D) A change in form of ownership that results in the rents, issues and profits therefrom being held as separate property, which, but for the change would have been community or quasi-community property;
  5. (E) Property which is “converted” within the meaning of Revenue and Taxation Code Section 13805(b) includes not only the property so converted, but also property acquired by the decedent in exchange (by one transaction or a series of transactions) for such separate property acquired by conversion, and includes property which was converted before or after January 1, 1976.
2. (2) If the value of the separate property acquired by the decedent as a result of a conversion (as provided in paragraph (1) above) did not exceed the value of the separate property thus acquired by the surviving spouse, the entire value of such separate property thus acquired by the decedent and its proceeds including rents, issues and profits shall be considered, for the purpose of Revenue and Taxation Code Section 13805(b), to be converted property not qualifying for marital exclusion under Revenue and Taxation Code Section 13805(b). If there is an unequal division so that one spouse receives more than one-half of the property which was transferred from community or quasi-community property into separate property, property held by each spouse is treated as converted property to the extent that the values (as of the date of the transfer) are equal.
  EXAMPLE (1). At the date of conversion, spouses divided $300,000 of community property (or quasi-community property) equally, $150,000 each. At the date of death, the deceased spouse's interest is valued at $180,000. The $180,000 is converted property and does not qualify for the marital exclusion.
  EXAMPLE (2). At the date of conversion, spouses divided $400,000 of community property (or quasi-community property) giving the deceased spouse $300,000 and the surviving spouse $100,000, the values were the same at the date of death. Therefore, the converted property is $100,000 and $200,000 qualifies for the marital exclusion which will be a maximum of $100,000.
3. (3) The exclusion provided under Revenue and Taxation Code Section 13805(a) is not available to a conversion of quasi-community property, including property subject to Probate Code Section 201.5, irrespective of whether the deceased spouse or the surviving spouse was the acquirer within the meaning of Probate Code Section 201.5. Therefore, if either spouse makes a transfer of quasi-community property (as defined in Revenue and Taxation Code Section 15300) so as to effect a conversion as provided in paragraphs (1) and (2) above, the one-half held by the decedent as his or her share of such property shall be treated as converted property.

Note: Authority cited: Section 14740, Revenue and Taxation Code. Reference: Section 13805, Revenue and Taxation Code.

History

1. Amendment filed 7-2-81; effective thirtieth day thereafter (Register 81, No. 27).