106-6 Marital Deduction Planning

Question 1

Marital Deduction

Answer 1

Generally, the decedent’s estate may claim an estate tax marital deduction for an unlimited amount of qualifying transfers to a surviving spouse (including a same sex spouse) who is a U.S. citizen

Marital deduction is disallowed if the surviving spouse is not a U.S. citizen unless 1 of 2 circumstances occur:
1. Surviving spouse was a U.S. resident at the time of the decedent’s death, has been a U.S. resident at all times since the decedent’s death, and becomes a U.S. citizen before the federal estate tax return is filed

2. Property passes to the surviving spouse through a qualified domestic trust (QDOT)

Question 2

3 Basic Requirements That Must Be Met to Qualify for the Estate Tax Marital Deduction

Answer 2

1. Property left to the surviving spouse must be included in the decedent’s estate
2. Property must pass to the decedent’s surviving spouse
3. The interest passing to the surviving spouse must not be a terminable interest

Question 3

Terminable Interest

Answer 3

An interest that ends on an event or contingency

A surviving spouse who receives a life estate in the property of the 1st spouse to die possesses an interest that terminates when the surviving spouse dies

A life estate is a classic terminable interest for purposes of the marital deduction

Question 4

Bypass Planning

Answer 4

Affluent spouses often find it advantageous to arrange their estates so that some of the property of the 1st spouse to die does not qualify for the marital deduction

This is known as bypass planning

The portion that does not qualify for the marital deduction ultimately transferred to someone else (usually adult children) so it is not included in (or bypasses) the surviving spouse’s estate

The specific estate planning technique that typically implements this bypass result is the nonmarital or B (for bypass), trust

Question 5

B (bypass) trust

Answer 5

Does not qualify for the marital deduction when the 1st spouse dies

The purpose of the bypass trust is to take advantage of the applicable credit amount when the 1st spouse dies (this credit is $4,505,800 in 2019 and is equivalent to $11,400,000 of taxable assets)

Aka Credit Shelter Trust or Exemption Equivalency Trust

Question 6

Restrictions of the use of portability

Answer 6

• only the unused lifetime exemption amount of the last predeceased spouse is available to a surviving spouse
• If a surviving spouse remarries and the 2nd spouse also predeceases the surviving spouse, the unused lifetime exemption amount of the 1st predeceased spouse is no longer available

Question 7

2 major forms of marital trusts for a U.S. citizen and a 3rd, less frequently used, form of trust in which the surviving spouse benefits

Answer 7

1. General Power of Appointment (A) trust
2. Qualified terminable interest property (QTIP or C) trust
3. Disclaimer (or D) trust

Question 8

General Power of Appointment trust (A trust)

Answer 8

Allows a terminable interest to be left to a surviving spouse and for the property to still qualify for the unlimited marital deduction in the deceased spouse’s estate

Surviving spouse will receive income from the trust payable at least annually for life

Surviving spouse s also given a general POA to determine the disposition of the trust property during lifetime or at death

Question 9

Qualified Terminable Interest Property trust (QTIP or C) trust

Answer 9

Allows a terminable interest to be left to a surviving spouse and for the property to still qualify for the marital deduction in the decedent’s estate

The surviving spouse is not usually given a general POA over the trust property, so the decedent can control the ultimate disposition of the property

C trust is attractive in the following situations:
1. when there is a second marriage situation and the 1st spouse to die has children from the 1st marriage

2. when first spouse to die is concerned that the surviving spouse may remarry, and the 1st spouse to die wants to ensure that his estate goes to his children

The assets of the C trust generally must be included in the surviving spouse’s gross estate to the extent that they are not consumed during the surviving spouse’s lifetime

Question 10

Disclaimer Trust

Answer 10

Not a marital form of trust at all, although it is for the benefit of the surviving spouse

Such a trust, also known as the D trust, allows the spouse to disclaim (refuse) part of the 1st spouse to die’s estate, which then goes to the bypass or nonmarital trust

Question 11

Qualified Domestic Trust (QDOT) and Planning for a non-U.S. citizen surviving spouse

Answer 11

The unlimited marital deduction is generally disallowed if the surviving spouse is not a U.S. citizen unless the property is transferred to the non-U.S. citizen surviving spouse in a qualified domestic trust (QDOT)

5 primary requirements for a trust to be treated as a QDOT:

1. the trust document must require at least 1 trustee to be a U.S. citizen or U.S. corporation
2. the noncitizen surviving spouse must receive all the income from the trust
3. The trustee must have the right to withhold federal estate tax on distributions of corpus to the surviving spouse
4. the trustee must have the right to withhold federal income tax on distributions of trust income to the surviving spouse
5. the executor of the original decedent’s estate must make an election on IRS Form 706 to qualify the property for the unlimited U.S. estate tax marital deduction

Question 12

100% Marital Deduction Planning

Answer 12

Used when all property is left outright to the surviving spouse

May result in the overfunding of the surviving spouse’s estate because all or part of the deceased’s applicable credit amount is unused

Question 13

Zero federal estate tax strategy

Answer 13

The most frequently used marital deduction planning strategy used by estate and financial planners

This strategy splits the 1st-to-die spouse’s estate into 2 shares: 1 taking advantage of the marital deduction via the establishment of either the A or C trust and the 2nd bypassing taxation in the surviving spouse’s estate via the creation of the B trust

The B trust is typically funded in an amount equal to the current lifetime exemption amount ($11,400,000 in 2019) w/ property that is expected to appreciate (such as real estate)

Either of the marital trusts is then funded w/ income-producing property such as securities

Question 14

Major advantages of using a revocable living trust in marital deduction planning

Answer 14

It permits the grantor to implement transfer tax savings at death and avoid the probate process

Question 15

Types of nontraditional relationships

Answer 15

Domestic partnerships, civil unions, couples who are cohabiting in less formal relationships

Non-spouses generally do not have any right to inherit their partner’s assets under state intestacy laws and generally are not recognized as next-of-kin or as family members who are authorized to make medical or end-of-life decisions for their partner

Question 16

Planning for Incapacity or Health Care

Answer 16

Both partners should implement durable powers of attorney for health care (DPOHC), authorizing the other partner to make decisions for them in the event of incapacity or terminal illness and execute advance medical directives such as living wills

Question 17

Cohabitation Agreement

Answer 17

Domestic partners and cohabitants who do not plan to get married may execute a cohabitation agreement (aka a palimony agreement) to address many of the planning issues they will face

Generally, it covers the ownership of the couple’s property and income during the existence of their relationship, as well as the distribution of their property if their relationship terminates or 1 of the partners dies