Contents Foreword Acknowledgments Introduction Chapter 1 Brief History Of The Estate Tax And The Marital Deduction 1 1.1 Historical Background Of The Federal Estate Tax And The Marital Deduction 1 1.2 Six Common Law States Adopt Community Property Law 2 (a) Uniform Disposition Of Community Property Rights At Death Act 3 1.3 1942 Estate Tax Amendment Treats Community Property Similar To Common Law Property 3 1.4 1948 Legislation Equalizes The Effects Of Community Property And Non-Community Property Jurisdictions By Establishing The Marital Deduction 3 (a) Gift Splitting And 50 Percent Marital Deduction Introduced 4 1.5 1976 Legislation Increases Marital Deduction Amount 4 1.6 1981 Legislation Provides Unlimited Marital Deduction And QTIP 5 1.7 Seven Types Of Federal Estate Tax Marital Deduction Currently Available 6 1.8 Checklist Of Advantages And Disadvantages Of The Different Types Of Federal Estate Tax Marital Deduction 6 (a) Advantages And Disadvantages Of An Outright Bequest To The Surviving Spouse 7 (1) Advantages 7 (2) Disadvantages 7 (b) Advantages And Disadvantages Of The Marital Deduction General Power Of Appointment Trust 7 (1) Advantages 7 (2) Disadvantages 8 xiii
xiv Drafting Marital Deduction Trusts (c) Advantages And Disadvantages Of The Marital Deduction Estate Trust 9 (1) Advantages 9 (2) Disadvantages 9 (d) Advantages And Disadvantages Of The QTIP Marital Deduction Trust 9 (1) Advantages 9 (2) Disadvantages 10 (e) Advantages And Disadvantages Of The Charitable Remainder Marital Deduction Trust 11 (1) Advantages 11 (2) Disadvantages 11 1.9 2001 Tax Act Tentative Repeal Of The Federal Estate Tax And Generation-Skipping Transfer Tax (And How To Plan For It) 12 (a) Modified Carryover Basis Instituted 13 (b) What It Means For Clients 15 (1) QTIP Trusts 16 (2) Increase In Basis 17 (c) Unanticipated Consequences Of The Increasing Applicable Exclusion Amount 18 (d) Certain Recapture Taxes Not Repealed 19 (e) Exclusion Of Gain On Sale Of Decedent s Principal Residence 20 1.10 Key Changes Affecting Transfer Taxes Under The 2001 Tax Act 20 Chapter 2 Requirements For The Federal Estate Tax Marital Deduction 23 2.1 Seven Essential Requirements For The Federal Estate Tax Marital Deduction 23 2.2 Legally Married Requirement 23 2.3 Survivorship Requirement For Spouse 24 (a) Simultaneous Death Act 24 (b) Six-Month Survival Condition 24 2.4 U.S. Citizen Requirement For Surviving Spouse 25 (a) Decedent Need Not Be A U.S. Citizen Or Resident 25
2.5 Includable In Decedent s Gross Estate Requirement 26 2.6 Passing Requirement 26 (a) Disclaimers 26 (b) Premarital Agreements 27 (c) Slayer s Statute 27 (d) Will Contests And Settlements 27 2.7 The Deductible Interest Requirement (And The Terminable Interest Rule) 27 (a) Terminable Interest Defined 28 (b) Nondeductible Terminable Interest Defined 28 (1) Examples Of Nondeductible Terminable Interests 28 (A) Discretionary Credit Shelter Trust 28 (B) Third-Party Interests 29 (C) Spousal Allowances And Awards 29 (D) Life Estates 29 (E) Joint And Mutual Wills 29 2.8 Exceptions To The Nondeductible Terminable Interest Rule 29 (a) Limited Survival Requirement 30 (b) Life Income Interest 30 (c) Estate Trust 30 (d) Life Insurance Or Annuity Payments 30 (e) QTIP 30 (f) Charitable Remainder Trust 30 (g) Annuities 31 (h) Equalization Clause 31 (i) Table Of Contents xv Loan Guaranty Secured By Property Passing To Spouse 31 (j) In Terrorem Clause 32 (k) Trustee Investment Powers 32 2.9 Net Value Requirement 32 Chapter 3 The Qualified Terminable Interest Property Marital Deduction Trust 35 3.1 Four Basic QTIP Trust Requirements 35 3.2 Income For Life Requirement 35 (a) Income Payable At Least Annually 36
xvi Drafting Marital Deduction Trusts (b) Usufruct 36 (c) Contingent Income Interest 36 (d) Stub Income 36 (e) Use Of Residence 36 (f) IRA Distributions To A QTIP Trust 37 (g) Non-Income-Producing Property 37 3.3 Power Of Appointment Over QTIP Trust 37 (a) Power To Distribute QTIP Principal To Surviving Spouse 37 (b) Testamentary Powers Of Appointment 38 (c) Gifts Of Distributed QTIP Trust Property 38 (d) Distribution Of QTIP Trust Property To Third Party 38 (e) Spouse s Power Of Withdrawal 39 (f) Nonqualified Disclaimer Of QTIP Trust Property 40 (g) Sale Of QTIP Property For Less Than Fair Market Value 41 (h) Trustee s Power To Adjust Income And Principal 42 3.4 Sole Beneficiary Requirement 42 3.5 Annuities And The QTIP Election 43 3.6 Partial QTIP Election 43 (a) Fraction Or Percentage Partial Election Only 43 (b) Sample Partial QTIP Election By Fractional Formula 44 (c) Division Of QTIP Trusts 44 (d) Non-Elected Property 45 (e) Shares Of Stock 45 (f) Usufruct Interest 45 (g) Postmortem Flexibility 45 (1) Previously Taxed Property Credit 47 (2) Example of PTP Credit 48 3.7 Clayton Contingent QTIP Election 52 (a) Clayton Decision 53 (b) More Flexible Form Of QTIP 54 (c) Contingent QTIP Is A Form Of Partial QTIP Election 55 3.8 Using Disclaimers To Qualify For QTIP Treatment 55
(a) Disclaimers And General Power Of Appointment Trust 55 (b) Third-Party Disclaimers 56 3.9 Payment Of Estate Tax On QTIP Trust 56 (a) Amount Of Estate Tax Recoverable By Spouse s Estate 56 (b) Gift Occurs Upon Failure To Recover Estate Taxes 56 (c) Gift Tax Inapplicable 56 (d) Payment Of Death Taxes On Reverse QTIP Property 57 (e) Waiver Of Right To Recover Estate Tax 57 3.10 The Inter-Vivos QTIP Trust 57 (a) Uses Of An Inter-Vivos QTIP Trust 58 (b) Final QTIP Regulations Permit Inter-Vivos QTIP Trusts 58 (c) Income Only Requirement 59 (d) Discharge Of Donor-Spouse s Legal Obligation Of Support 60 (e) Testamentary Limited Power Of Appointment 60 (f) Death Of Donee-Spouse 61 (g) Donor-Spouse s Contingent Life Estate 61 (h) Donor-Spouse As Trustee 62 (i) Donor Spouse s Income Interest Must Follow Donee-Spouse s Interest 63 (j) QTIP Election 64 (k) Payment Of Estate Tax On Inter-Vivos QTIP Trust 65 (l) Table Of Contents xvii Income Taxation Of The Inter-Vivos QTIP Trust During Marriage 65 (m) 2001 Tax Act And Inter-Vivos QTIP Trusts 66 3.11 QTIP Election Requirement 66 3.12 Summary Of QTIP Trust Election 67 (a) Purpose Of The Election 67 (b) Manner Of Making The Election 67 (c) Election Made By Executor 67 (d) Time For Making The Election 67 (e) Protective Election 68
xviii Drafting Marital Deduction Trusts (f) Partial Election 68 (g) Revocation Of The Election 69 (h) Extension Of Time To Make The Election 69 (i) Election Treated As Void 69 (j) Automatic QTIP Election For Joint And Survivor Annuities 69 3.13 Reverse QTIP Election 69 (a) 2001 Tax Act And Reverse QTIP Elections 71 (b) Payment Of Death Taxes On Reverse QTIP Property 72 3.14 Summary Of Reverse QTIP Trust Election 72 (a) Purpose Of The Election 72 (b) Manner Of Making The Election 73 (c) Election Made By Executor 73 (d) Time For Making The Election 73 (e) Protective Election 73 (f) Partial Election 73 (g) Revocation Of The Election 73 (h) Extension Of Time To Make The Election 74 (i) Allocation Of GST Tax Exemption Void 74 3.15 2001 Tax Act Basis Adjustment And The QTIP Trust 74 3.16 Sample QTIP Marital Deduction Trust 75 3.17 Sample State Death Tax QTIP Marital Deduction Trust 75 Chapter 4 The General Power Of Appointment Marital Deduction Trust 77 4.1 Four Basic Requirements 77 4.2 Specific Portion Of Property Interest Requirement 77 4.3 Income For Life Requirement 78 4.4 Sole Beneficiary Requirement 79 (a) Distributions For Spouse s HESM 79 4.5 General Power Of Appointment Requirement 79 (a) Required Appointees 79 (b) Local Law Governs The Power Of Appointment 80 (c) Power Exercisable By Spouse Only 80 (d) Power Exercisable In All Events 80
Table Of Contents xix (e) Takers In Default Of The Power 80 (f) Power Of Withdrawal Or Revocation Of The GPOA Trust Suffices 80 (g) Legal Life Estate With Power Of Appointment May Suffice 81 (h) Disclaiming The General Power Of Appointment 81 4.6 Payment Of Estate Tax On GPOA Trust 81 (a) Recovery Of Estate Tax Paid By Surviving Spouse s Estate 81 4.7 Sample General Power Of Appointment Marital Deduction Trust 81 Chapter 5 Qualified Domestic Trusts For The Non U.S. Citizen Spouse 85 5.1 Non U.S. Citizen Surviving Spouse And The Marital Deduction 85 5.2 Six Basic QDOT Requirements 86 (a) Traditional Marital Deduction Trust 86 (b) Trustee A U.S. Citizen 86 (c) Ordinary Trust 87 (d) Trustee Right To Withhold QDOT Tax 87 (e) Must Meet Tax Collection Requirements 88 (f) Executor Election 88 5.3 Reforming A Non-Compliant Trust Into A QDOT 89 5.4 Transfer Of Property by Surviving Spouse To A QDOT 89 (a) Requirements For A Valid Transfer 89 (b) QDOT Must Meet Marital Deduction Requirements For Certain Transfers 90 (c) QDOT Created By Surviving Spouse 91 (d) Spouse Becomes Transferor For Tax Purposes 91 (e) No Creditor Protection For Transferred Property 92 (f) Transfers By Surviving Spouse s Agent 92 (g) Joint Property 93 (h) Non-Transferable Property May Be Transferred To A Corporation 93 5.5 QDOT Treatment For Retirement Benefits 93
xx Drafting Marital Deduction Trusts (a) IRAs And 401(k)s 94 5.6 QDOT Property Is Subject To Special Estate Taxation 95 (a) Taxable Event Triggers QDOT Tax 95 (b) List Of Taxable Events 95 (c) Payment Of QDOT Tax By Trustee 96 (d) List of Nontaxable Events 96 (e) Due Date Of QDOT Tax 98 (f) Apportionment Of QDOT Tax 98 5.7 QDOT And Tentative Repeal Of The Federal Estate Tax 99 (a) 2001 Tax Act QDOT Sunset Dates 99 5.8 QDOT Security Arrangements 100 (a) Bank Requirement 100 (b) Bond Or Letter Of Credit Requirement 100 5.9 Determining The Amount Subject To QDOT Security Arrangement 100 (a) Identifying The Principal Residence 100 (b) Furnishings 101 (c) Filing Of Statements 101 (d) Rollover Of Sale Proceeds 101 5.10 QDOT Security Arrangements For Estates Less Than $2 Million 101 5.11 Safe Harbor QDOT Security Arrangements 102 5.12 Summary Of QDOT Election 102 (a) Purpose Of The Election 102 (b) Manner Of Making The Election 102 (c) Election Made By The Executor 102 (d) Time For Making The Election 103 (e) Protective Election 103 (f) Partial Election 103 (g) Extension Of Time To Make The Election 103 5.13 Summary Of QDOT Election To Exclude Value Of Spouse s Personal Residence 103 (a) Purpose Of The Election 103 (b) Manner Of Making The Election 104 (c) Election Made By The Executor 104 (d) Partial Election 104 (e) Revocation And Extension Of Time To Make The Election 104
Table Of Contents xxi 5.14 Summary Of Special QDOT Election If Spouse Becomes a U.S. Citizen 104 (a) Purpose Of The Election 104 (b) Manner Of Making The Election 105 (c) Time For Making The Election 105 (d) Protective And Partial Elections 105 (e) Revocation And Extension Of Time To Make The Election 105 5.15 Sample QDOT Provisions 105 Chapter 6 Spousal Income Requirement And The Marital Deduction Trust 109 6.1 All Income To Surviving Spouse 109 (a) Meaning Of Income 109 (b) Same Principles Apply To QTIP And GPOA Marital Deduction Trusts 109 (c) Power To Terminate Trust May Suffice 110 (d) Compelled Right To Income Suffices 110 (e) Delayed Receipt Of Income 110 6.2 New IRS Regulations Concerning Income 111 (a) Prudent Investor Rule 111 (b) Uniform Principal and Income Act 112 (c) Unitrust Payments 112 (d) Requirements Of The Regulations 113 6.3 Contingent Income Interest 114 6.4 The Marital Deduction Estate Trust An Exception To The All-Income Requirement 114 (a) Accumulation Of Income Is Permitted 115 (b) Unproductive Property Is Permitted 115 (c) Death Of Spouse 115 (d) 2001 Tax Act And Basis Adjustment 115 6.5 Sample Marital Deduction Estate Trust 115 Chapter 7 Trustee Powers That May Affect The Marital Deduction Trust 117 7.1 Allocation Of Income And Expenses 117 (a) RUPIA 117 7.2 Payment Of Estate Administration Expenses And Claims The Hubert Regulations 118 (a) Background 118 (b) New Regulations Issued 119
xxii Drafting Marital Deduction Trusts (c) Estate Transmission Expenses Defined 120 (1) Three Rules Concerning Estate Transmission Expenses 120 (A) Additional Rules Concerning Pecuniary Marital Bequests 122 (2) Where To Deduct Estate Transmission Expenses 126 (d) Estate Management Expenses Defined 126 (1) Three Rules Concerning Estate Management Expenses 127 (2) Where To Deduct Estate Management Expenses 129 (e) Summary of Hubert Regulations 129 (f) IRS Illustrations 130 (g) Questions And Answers Concerning The Hubert Regulations 140 (1) When Does It Matter Whether An Expense Is Characterized As A Transmission Expense Or A Management Expense? 140 (2) Why Does It Matter Whether An Expense Is Characterized As A Transmission Expense Or A Management Expense? 140 (3) Will Management Expenses Be Significant? 140 (4) Should Commissions And Counsel Fees Be Allocated Between Transmission And Management Expenses? 140 (5) Where Should Expenses Be Deducted? 141 (6) What Is The Impact On The Selection Of A Marital Deduction Formula? Do The Regulations Make One Formula More Attractive Than Another? 141 (7) Should Marital Formulas Be Reviewed? 142 7.3 Unproductive Marital Trust Property 142 (a) Rules For Holding Unproductive Property 142 7.4 Accumulation, Withholding, Or Termination Of Marital Trust Income 143
Table Of Contents xxiii (a) Accumulation Of Income 143 (b) Termination Of Income 144 (c) Income Limited By A Standard 144 (d) Discretion Over Income Distributions 144 (e) Compelled Distribution Of Income Suffices 144 (f) Stub Income Requirement For GPOA Marital Deduction Trust 145 (g) Stub Income Requirement For QTIP Trust 145 7.5 Facility-Of-Payment Provision 145 7.6 Spendthrift Provision 146 7.7 No-Contest Clause 146 7.8 Delay In Funding The Marital Trust 147 (a) Income Earned During Administration Of The Grantor s Estate 147 (b) Deemed Funding 148 7.9 Funding The Marital Deduction Trust With Unidentified Assets 148 7.10 Power To Appoint Marital Trust Property During Surviving Spouse s Lifetime 149 (a) Distributions For Minor Children s Support 150 (b) Power Of Withdrawal In Order To Make Gifts 150 7.11 Power To Pay Death Taxes 150 7.12 Underfunding The Marital Trust 153 7.13 Overfunding The Marital Trust 153 7.14 Overfunding The Credit Shelter Trust 153 Chapter 8 Limiting The Trustee s Power In Order To Ensure The Availability Of The Marital Deduction 155 8.1 Restrict Boilerplate Powers 155 8.2 Include Marital Deduction Savings Clause 155 (a) Careful Drafting Is A Prerequisite 156 (b) Limit The Surviving Spouse s Powers 156 Chapter 9 Tax-Sensitive Powers Regarding The Beneficiary-Trustee 159 9.1 Estate Tax Issues And The Beneficiary-Trustee 159 (a) Death Of Beneficiary-Trustee 159 (b) Ascertainable Standards 159 (c) Negation Of Ascertainable Standard 160
xxiv Drafting Marital Deduction Trusts (d) Co-Trustee With Substantial Adverse Interest 160 (e) Beneficiary-Trustee s Power Of Withdrawal 162 (1) Lapse Of Power Of Withdrawal 162 (f) Beneficiary-Trustee s Ability To Remove And Appoint A Co-Trustee 163 9.2 Gift Tax Issues And The Beneficiary-Trustee 163 (a) Distributions By Beneficiary-Trustee To Other Beneficiaries 164 (1) Ascertainable Standard 164 (b) Beneficiary-Trustee s Lapse Of Power Of Withdrawal 164 9.3 Income Tax Issues And The Beneficiary-Trustee 165 (a) Beneficiary-Trustee s Sole Power To Make Distributions 165 (1) Power Of Withdrawal 166 (b) Distributions Made With Consent Of Co-Trustee 166 9.4 Distributions That Discharge A Trustee s Personal Legal Obligations 166 (a) Beneficiary-Trustee s Discharge Of Personal Legal Obligations 166 (b) Super Support Exception 168 (c) Income Tax Consequences Of Discharging A Personal Legal Obligation 168 9.5 Overly Broad Discretionary Powers Over Investments And Principal-Income Matters 169 (a) State Street Rationale And The Regulations 169 9.6 Power To Terminate Trust 170 9.7 A Trustee s Power To Avoid Adverse Estate, Gift, And Income Tax Treatment 170 Chapter 10 Limiting Trustee Selection And The Surviving Spouse As Beneficiary-Trustee 171 10.1 Selection Of Trustee 171 (a) Power To Remove And Replace Trustee 171 10.2 Trustee Duties 172 (a) Duty To Administer The Trust According To Its Terms 173 (b) Duty Of Loyalty To The Trust And Its Beneficiaries 173
(c) Duty To Administer The Trust With Reasonable Skill And Care 174 (d) Prudent Investor Rule 174 (e) Duty To Give Notices, Furnish Information, And Communicate With The Trust Beneficiaries 174 (f) Duty To Collect, Control And Use Reasonable Care And Skill To Preserve And Protect Trust Property 174 (g) Duty To Account To The Beneficiaries 174 (h) Duty To Keep Accurate Records 174 (i) Duty To Identify And Separate Trust Property 174 (j) Duty To Enforce Trust Claims 175 (k) Duty To Make Decisions Concerning Discretionary Distributions 175 (l) Duty To Uphold And Defend The Trust 175 (m) Duty To Participate In The Administration Of The Trust 175 (n) Duty Of Impartiality 175 (o) Duty To Make Property Productive 175 (p) Duty Not To Delegate 176 (q) Duty To Determine Principal And Income 176 (r) Duty Of Confidentiality 176 (s) Table Of Contents xxv Duty To Follow Instructions Of Superior Powerholder 176 10.3 Trustee Liabilities 176 (a) Typical Trustee Liabilities 177 10.4 Trustee Attributes 177 10.5 Surviving Spouse As Beneficiary-Trustee Of The Marital Deduction Trust 178 (a) General Power Of Appointment Marital Deduction Trust 178 (b) QTIP Marital Deduction Trust 178 (c) Sole Trustee Of Marital Trust 179 (d) Second Marriages 180 10.6 Surviving Spouse As Beneficiary-Trustee Of The Credit Shelter Trust 180 10.7 Use Of Independent Trustee For Marital And Credit Shelter Trusts 180
xxvi Drafting Marital Deduction Trusts (a) Using An Independent Trustee 180 (b) Tax-Sensitive Powers Held By Independent Trustee 181 (c) Second Marriages 181 (d) QDOTs 181 10.8 Surviving Spouse And Independent Trustee As Co-Trustees 181 Chapter 11 Drafting Flexibility Into Marital Deduction Trusts And Credit Shelter Trusts 183 11.1 Designing Flexible Estate Plans Under The 2001 Tax Act 183 11.2 All To Surviving Spouse In A Divisible QTIP Marital Deduction Trust With A Partial QTIP Election 184 11.3 All To Surviving Spouse In A QTIP Marital Deduction Trust With Clayton Contingent QTIP Election 184 (a) Time For Election 185 (b) Post-Mortem Flexibility 185 (c) Apportionment Of Estate Taxes 185 11.4 All Outright To Surviving Spouse With Right To Disclaim To Credit Shelter Trust 187 (a) Federal Disclaimer Law 187 (b) Requirements For A Qualified Disclaimer 188 (c) Types Of Qualified Disclaimers 190 (d) Danger Of Accepting Benefits Before Disclaiming 192 (e) Disclaimer Must Be Valid Under State Law 192 (f) Disclaimed Property Can Be Held In Trust For Surviving Spouse 193 (g) Surviving Spouse As Trustee Of Credit Shelter (Disclaimer) Trust 194 (h) Give Surviving Spouse s Attorney-In-Fact Power To Execute Disclaimers 194 (i) Apportionment Of Estate Taxes 195 (j) Disclaimers And Spendthrift Provisions 196 (k) Reminder Letter To Clients 196 (l) Advantages Of Disclaimer Approach 197 (m) Disadvantages Of Disclaimer Approach 197
Table Of Contents xxvii (n) Clayton Contingent QTIP vs. Disclaimer Approach 197 11.5 Permit Trustee To Terminate Trust 198 (a) Potential Adverse Tax Consequences 198 (b) Spendthrift Provisions 198 (c) Protect Marital And Charitable Deduction 198 11.6 Appoint A Special Powerholder 199 (a) Protect Marital And Charitable Deduction 199 11.7 Give Spouse And Children Testamentary Limited Powers Of Appointment 199 11.8 Use Of State Death Tax Marital Deduction Trust 200 11.9 Use Of Joint Trusts For Nontaxable Estates 200 Chapter 12 Advanced Planning Opportunities And Techniques 201 12.1 Use Credit Shelter Trust To Hold Life Insurance On Spouse s Life 201 12.2 Provide Incentives To Beneficiaries 202 12.3 Insulate Credit Shelter Trust from Successive Taxation At Multiple Generations 202 (a) Avoid Unintentional General Powers Of Appointment 202 (b) Limit Powers Of Withdrawal 204 (c) Life Insurance Policies 204 12.4 Fractional Interest Discount Planning With QTIP Trust 205 (a) Business QTIP Trust 206 (b) General Powers Of Appointment 206 (c) Limited Powers Of Appointment 207 12.5 Funding Trusts With Fractional (Discounted) Interests 207 (a) Chenoweth Decision 207 (b) Decreased Marital Deduction On Funding 208 12.6 Transfer Of QTIP Interest By Surviving Spouse 209 (a) Gift Tax On Transfer 210 (b) Right To Recover Gift Tax Paid 211 (c) Unrecovered Gift Tax 211 (d) Net Gift Treatment 211 (e) State Disclaimer Law 211 (f) Spendthrift Provisions 212
xxviii Drafting Marital Deduction Trusts (g) Divide QTIP Trust Before Disclaiming 212 12.7 Use Of QTIP Trust For Asset Protection 212 (a) Distribution Of Income During Surviving Spouse s Life 212 (b) Manner Of Distributing Income 213 (c) Distribution Of Stub Income At Spouse s Death 213 (d) Provision Regarding Unproductive Property 213 (e) Spendthrift Provision 214 (f) Use A Clayton Contingent QTIP Election To Deal With The Potential Insolvent Disclaimant-Spouse 215 (g) Gift To Inter-Vivos QTIP With Retained Secondary Life Interest 216 (h) Naming A QTIP Trust As The Beneficiary Of A Retirement Account 217 (i) Payment Of Taxes On Assets In Reverse QTIP Trust From An Outside Source 218 12.8 Use QTIP And Credit Shelter Trust Assets To Form Family Limited Partnership 218 12.9 Disclaimer Based GST Tax Planning For The Surviving Spouse s Estate 220 12.10 Use QTIP Total Return Trust For Second-Marriage Situations 221 12.11 Use Inter-Vivos QTIP Trust To Avoid State Death Taxes 223 12.12 Estate Tax Friendly Divorce Planning Using An Alimony Trust 223 Chapter 13 Generation-Skipping Transfer Tax Issues And The Marital Deduction Trust 225 13.1 Brief Overview Of The GST Tax 225 13.2 Generation-Skipping Transfer Defined 226 13.3 Taxable Termination Defined 227 (a) Amount Of GST Tax 228 (1) Meaning Of Tax-Inclusive Basis 228 (b) Simultaneous Terminations 231 (c) Change In Identity Of Transferor 231 (d) Death Of Lineal Descendant 231 (e) Reporting Requirements 231
Table Of Contents xxix 13.4 Basis Adjustment For GST Tax Paid 231 13.5 Taxable Distribution Defined 232 (a) Amount Of GST Tax 233 (b) Payment Of GST Tax By Trustee 233 (c) Multiple Simultaneous Skips 233 (d) Reporting Requirements 233 13.6 Income Tax Deductions For GST Tax Paid 234 13.7 Direct Skip Defined 234 (a) Amount Of GST Tax 234 (b) Payment Of GST Tax 234 (c) Certain Direct Skips Not Subject To GST Tax 235 (d) Multiple Simultaneous Direct Skips 235 (e) Reporting Requirements 235 13.8 Skip Person Defined And Generation Assignments 236 (a) Generation Assignments Summarized 236 13.9 Predeceased Parent Rule And Generation Assignments 237 (a) Ninety-Day Survival Rule 237 (b) Effect Of Disclaimers 238 13.10 Transferor Defined 238 (a) Gift Splitting 239 13.11 Taxation Of Multiple Skips And Transferor Move-Down Rule 239 13.12 Inclusion Ratio Defined 240 (a) Simple Definition Of Inclusion Ratio 241 (b) Changes To The Inclusion Ratio 242 13.13 Right To Recover GST Tax Paid 242 13.14 Valuation Of Property For GST Tax Purposes 242 13.15 Appropriate Interest Defined 243 13.16 The GST Tax Exemption 244 13.17 The Reverse QTIP Election 245 (a) Partial Reverse QTIP Election Not Permitted 246 (b) Payment Of Death Taxes On Reverse QTIP Property 246 13.18 Allocation Of GST Tax Exemption 247 13.19 Overview Of The GST Tax Separate Share, Separate Trust, And Valuation Rules 248 (a) Overview Of The Separate Share Rule 248
xxx Drafting Marital Deduction Trusts (b) Overview Of The Separate Trust Rule 249 (c) Overview Of The Valuation Rules 249 (d) Some Of The Three Rules Overlap 250 (e) Formula Clauses And The Three Rules 250 13.20 The GST Tax Separate Share Rule 251 (a) Two Requirements For A Single Trust With Multiple Beneficiaries To Be Treated As Having Separate Shares For GST Tax Purposes 251 (1) Existence Of Shares Requirement 254 (2) Allocation Requirement 254 (b) Severance Of A Separate Share From A Single Trust 254 (1) Requirements For A Fractional Severance Of A Separate Share From A Single Trust 254 (2) Requirements For A Mandatory Pecuniary Severance Of A Separate Share From A Single Trust 255 (c) Four Requirements For Payment Of A Pecuniary Bequest To Be Treated As A Separate Share For GST Tax Purposes 255 (1) Mandatory Right Requirement 255 (2) Transferor s Gross Estate Requirement 256 (3) Appropriate Interest Requirement 256 (4) Special Funding Requirement 256 (d) Compliance With The Rules Concerning Payment Of A Pecuniary Bequest Being Treated As A Separate Share For GST Tax Purposes Automatically Results In Compliance With The GST Tax Valuation Rules 258 13.21 The GST Tax Separate Trust Rule 259 (a) Two Requirements For Dividing (On A Mandatory Basis) A Single Trust Into Separate Trusts For GST Tax Purposes 259 (1) Transferor s Gross Estate Requirement 260 (2) Mandatory Severance Requirement 260 (b) Five Requirements For Dividing (On A Discretionary Basis) A Single Trust Into Separate Trusts For GST Tax Purposes 261
Table Of Contents xxxi (1) Transferor s Gross Estate Requirement 261 (2) Discretionary Severance Requirement 261 (3) Same Succession Of Beneficial Interest Requirement 261 (4) Federal Estate Tax Due Date Requirement 261 (5) Special Funding Requirement 262 (A) Fractional Funding Of Severed Trusts Requirement 262 (B) Pecuniary Funding Of Severed Trusts Requirement 262 (c) Minimum-Worth Marital Deduction Funding Formula 262 (d) Compliance With The Requirements For A Discretionary Severance Under The Separate Trust Rule Automatically Results In Compliance With The GST Tax Valuation Rules 263 (e) Mandatory Severance Of Trusts Is Preferable Over Discretionary Severance Of Trusts 264 13.22 The GST Tax Valuation Rules 264 (a) Two Valuation Rules Apply For Allocation Of GST Tax Exemption To A Pecuniary Bequest Payable At Death 265 (1) First Valuation Rule Requirement For Allocation Of GST Tax Exemption To A Pecuniary Bequest Payable Solely In Cash 265 (2) Second Valuation Rule Requirements For Allocation Of GST Tax Exemption To A Pecuniary Bequest Payable With Noncash Property 266 (b) Two Valuation Rules Apply For Allocation Of GST Tax Exemption To Residue Following A Pecuniary Bequest Payable At Death 268 (1) First Valuation Rule A Pecuniary Bequest Satisfied In Cash Or In Kind (Preceding The GST Transfer) Must Receive Appropriate Interest 269
xxxii Drafting Marital Deduction Trusts (2) Second Valuation Rule A Pecuniary Bequest Satisfied With Noncash Assets (Preceding The GST Transfer) Must Be Funded Using The Assets Date-Of-Distribution Value Or In A Manner Fairly Representative Of The Assets Appreciation And Depreciation 270 (c) Compliance With The Separate Trust Discretionary Severance Rules Automatically Results In Compliance With The Valuation Rules 271 13.23 Using Fractional And Pecuniary Formulas To Create GST-Tax-Exempt Trusts 272 13.24 Mandatory or Discretionary Division Of QTIP Trust By Trustee For GST Tax Purposes 273 13.25 Discretionary Division Of Trusts By Trustee For GST Tax Purposes 273 13.26 Automatic Allocation Of GST Tax Exemption Upon Death Of Transferor 274 13.27 Certain GST Tax Exemption Allocations Are Void 275 13.28 Checklist Of 28 Rules For GST Tax Planning With Marital Deduction Trusts 275 13.29 Sample Trustee Powers For GST Tax Issues 282 Chapter 14 2001 Tax Act And Liberalized GST Tax Rules 283 14.1 Increase In GST Tax Exemption Amount And Lowering Of GST Tax Rate 283 (a) Distributions And Gifts In 2009 And 2010 284 14.2 Qualified Trust Severance Rules 284 14.3 Determining The Value Of Property On A Timely GST Tax-Exemption Allocation 285 14.4 IRS May Grant Extension Of Time To Make A Timely GST-Tax-Exemption Allocation 286 (a) IRS Guidance 287 (b) IRS Generous In Granting Extensions 287 14.5 Substantial Compliance Suffices For GST-Tax- Exemption Allocations 287 Chapter 15 Marital Deduction Funding Formulas And Their Tax Consequences 289
Table Of Contents xxxiii 15.1 Two Basic Types Of Marital Deduction Funding Formulas 289 15.2 Selecting a Marital Deduction Funding Formula 291 (a) Post-Death Appreciation Or Depreciation 291 (b) Income Taxes 291 (c) Ease Of Administration 292 (d) Flexibility On Funding 292 15.3 Overview Of The Pecuniary Funding Formulas 292 (a) Five Types Of Pecuniary Funding Formulas 292 (b) DNI Issues 293 (1) DNI Details 293 (c) IRD Issues 295 (d) Other Tax Issues 298 (e) Pre-1982 Marital Deduction Formulas 299 15.4 The True-Worth Marital Deduction Funding Formula 300 (a) Formula Freezes Marital Trust Amount 304 (b) Flexible Asset Selection For Funding Purposes 305 (c) Realization Of Gain Or Loss On Funding 307 (d) DNI Issues 309 (1) DNI Details And Allocation Of Income To A Pecuniary Bequest 310 (e) Income Tax Basis 312 (f) Special Election To Recognize Gain Or Loss On Funding 313 (g) GST Tax Exemption Issues 313 (h) Formula Accelerates Recognition Of IRD By Grantor s Estate 313 15.5 The Fairly Representative Marital Deduction Funding Formula 314 (a) Formula Permits Marital Trust Amount To Fluctuate In Value 316 (b) No Realization Of Gain Or Loss On Funding 317 (c) DNI Issues 317 (d) Special Election To Recognize Gain Or Loss On Funding 318 (e) Income Tax Basis 320 (f) GST Tax Exemption Issues 321 (g) Formula Accelerates Recognition Of IRD By Grantor s Estate 321
xxxiv Drafting Marital Deduction Trusts 15.6 The Minimum-Worth Marital Deduction Funding Formula 321 (a) Formula Protects Marital Trust Amount From Depreciation 324 (b) Realization Of Gain Or Loss On Funding 324 (c) Income Tax Basis 325 (d) Flexible Asset Selection For Funding Purposes 325 (e) DNI Issues 326 (f) Special Election To Recognize Gain On Funding 326 (g) GST Tax Exemption Issues 326 (h) Collective Style Of Minimum-Worth Marital Deduction Funding Formula 326 (i) Formula Accelerates Recognition Of IRD By Grantor s Estate 327 15.7 The True-Worth Credit Shelter Funding Formula 327 (a) Formula Freezes Credit Shelter Trust Amount 330 (b) Formula Permits Marital Trust Amount To Fluctuate In Value 331 (c) Mirror Image Of The True-Worth Marital Deduction Funding Formula 332 15.8 The Fairly Representative Credit Shelter Funding Formula 332 (a) Formula Permits Marital Trust Amount To Fluctuate In Value 334 (b) Mirror Image Of The Fairly Representative Marital Deduction Funding Formula 334 15.9 Overview Of The Two Fractional Funding Formulas 334 (a) Defining The Residue Of The Grantor s Estate 335 (1) Using True (Net) Residue Provisions 336 (b) Fractional Funding Formulas Permit Marital Trust Amount To Fluctuate In Value 339 (c) Fractional Funding Formulas Do Not Accelerate Recognition Of IRD 339 (d) DNI Issues 340 (e) Special Election To Recognize Gain Or Loss On Funding 340
Table Of Contents xxxv (f) GST Tax Exemption Issues 340 (g) Disproportionate Non-Simultaneous Funding Distributions Require Recomputation Of Fraction 341 15.10 The Pro-Rata Fractional Marital Deduction Funding Formula 341 (a) Potential For Realization Of Capital Gains On Funding 343 15.11 The Pick And Choose Fractional Marital Deduction Funding Formula 344 (a) Fiduciary s Authority To Make Non-Pro-Rata Distributions 346 Chapter 16 Checklist Of Advantages And Disadvantages Of The Seven Marital Deduction Funding Formulas 349 16.1 Advantages And Disadvantages Of The True-Worth Marital Deduction Funding Formula 349 (a) Advantages 350 (b) Disadvantages 350 (c) Summary 351 16.2 Advantages And Disadvantages Of The Fairly Representative Marital Deduction Funding Formula 352 (a) Advantages 352 (b) Disadvantages 353 (c) Summary 354 16.3 Advantages And Disadvantages Of The Minimum-Worth Marital Deduction Funding Formula 354 (a) Advantages 355 (b) Disadvantages 355 (c) Summary 356 16.4 Advantages And Disadvantages Of The True-Worth Credit Shelter Funding Formula 356 (a) Advantages 356 (b) Disadvantages 356 (c) Summary 357 16.5 Advantages And Disadvantages Of The Fairly Representative Credit Shelter Funding Formula 358
xxxvi Drafting Marital Deduction Trusts (a) Advantages 358 (b) Disadvantages 359 (c) Summary 360 16.6 Advantages And Disadvantages Of The Pro-Rata Fractional Marital Deduction Funding Formula 360 (a) Advantages 360 (b) Disadvantages 361 (c) Summary 362 16.7 Advantages And Disadvantages Of The Pick And Choose Fractional Marital Deduction Funding Formula 362 (a) Advantages 362 (b) Disadvantages 363 (c) Summary 364 Chapter 17 Summary Of Marital Deduction Funding Formulas (With Checklist And Chart) 365 17.1 Summary Of Marital Deduction Pecuniary Funding Formulas 365 (a) True-Worth Marital Deduction Funding Formula 365 (b) Fairly Representative Marital Deduction Funding Formula 366 (c) Minimum-Worth Marital Deduction Funding Formula 366 17.2 Summary Of Credit Shelter Pecuniary Funding Formulas 367 (a) True-Worth Credit Shelter Funding Formula 367 (b) Fairly Representative Credit Shelter Funding Formula 367 17.3 Summary Of Fractional Marital Deduction Funding Formulas 368 (a) Pro-Rata Fractional Funding Formula 368 (b) Pick And Choose Fractional Funding Formula 368 17.4 Marital Deduction Funding Formula Checklist 369 17.5 Chart Of Pecuniary And Fractional Funding Formulas And Their Consequences 371 Chapter 18 Sample Marital Deduction Trust Forms 377 18.1 Sample Marital Deduction Trust Form 377
Table Of Contents xxxvii 18.2 Sample Inter-Vivos QTIP Marital Deduction Trust Form 379 Appendix 1 Sample Marital Deduction Trust Form 381 Appendix 2 Sample Inter-Vivos QTIP Marital Deduction Trust Form 473 Appendix 3 The Final Minimum Distribution Rules For IRAs (And Their Impact On Trusts) 543 Appendix 4 Decision Tree: Precuniary Payment From A Transferor s Inter-Vivos Trust 579 Appendix 5 Decision Tree: GST Tax Separate Share Rule 580 Appendix 6 Decision Tree: Determining Separate Trusts 581 Appendix 7 Decision Tree: Determining The Denominator Of The Applicable Fraction In A Pecuniary Bequest Situation 582 Appendix 8 Decision Tree: Determining the Denominator Of the Applicable Fraction In A Residuary Transfer Situation 583 Table of Cases 585 Table of Statutes, Rules, and Regulations 591 Index of Subjects 609