Estate Tax Marital Deduction (Portfolio 843)

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Tax Management Portfolio, Estate Tax Marital Deduction, No. 843-3rd, presents a detailed study of the marital deduction under the federal wealth transfer tax laws.

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Tax Management Portfolio, Estate Tax Marital Deduction, No. 843-3rd, presents a detailed study of the marital deduction under the federal wealth transfer tax laws. It analyzes practical and tax advantages of using the marital deduction (as well as its potential pitfalls), including issues raised in planning, qualification, funding, and administering a marital bequest.
Section 2056 grants an unlimited federal estate tax marital deduction for qualifying dispositions of property to or for the benefit of a decedent's surviving spouse. The estate tax marital deduction, together with the §2523 unlimited federal gift tax marital deduction for qualifying lifetime transfers, provides the most powerful estate planning tool available for married individuals. Through optimum use of the marital deduction, all federal wealth transfer taxes can be deferred until the surviving spouse's death, regardless of the size of the estate of the first spouse to die.
The portfolio explores the following questions that the estate planner must answer in formulating and funding a marital bequest: How much marital deduction is appropriate and what role should portability of the unused exclusion amount play? Which of the many forms of qualifying disposition is preferable? How should a clause be drafted to qualify the preferred disposition for the marital deduction? Which of the eight available alternatives for funding the marital bequest should be used to segregate the marital bequest from the rest of the decedent's property and transfer it to the dispositive vehicle chosen? Further, the special requirements for bequests to spouses who are not U.S. citizens also are examined.
The author employs a number of abbreviations. A glossary of these appears following the Portfolio Description.
This portfolio may be cited as Pennell, 843-3rd T.M., Estate Tax Marital Deduction.


Jeffrey N. Pennell

Professor Jeffrey Pennell is the Richard H. Clark Professor of Law at Emory University School of Law in Atlanta. A graduate of Northwestern University School of Law, he is a Member of the American Law Institute and an Adviser for both Restatements of the Law (Third) (Wills and Other Donative Transfers, and Trusts), a former member of the Council of the Real Property, Trust and Estate Section of the American Bar Association, an Academic Fellow and former Regent of the American College of Trust and Estate Counsel, and an Academician of The International Academy of Estate and Trust Law. His various publications include a handful of student and classroom texts, several Tax Management Portfolios, dozens of articles and institute chapters, and he is the successor author of Casner and Pennell, Estate Planning (8th ed. 2012).

Table of Contents

Detailed Analysis

I. Introduction

A. Scope of This Portfolio

B. Importance of the Marital Deduction in Estate Planning

C. Historical Background

D. Transition Date Rule: Pre-1982 Wills Containing Formula Clauses

E. Importance of Advising Clients with Pre-1982 Wills

F. Importance of Advising Clients with Pre-2010 Estate Plans

II. Basic Marital Deduction Planning

A. Overview

B. Basic Structure of Estate Planning for Spouses

C. Tax Sensitive Outright Dispositions to Surviving Spouse

1. In General

2. Survivorship Requirements

3. Disclaimers

4. The Preferable Approach

D. A Note About Community Property

E. Drafting in Contemplation of Disclaimer

1. In General

2. Advantages

3. Disadvantages

III. Planning and Drafting for Larger Estates

A. Overview

B. Advantages of Deferral

C. Disadvantages of Deferral

D. The Time Value of Money Rationale for Deferral

E. Analysis of “Six-Month Equalizer” Plan

F. Basis Concerns

G. Using the Previously Taxed Property Credit

H. A Note About Formula Clauses and Computations

IV. Specialized Situations That Affect Proper Size of Marital Bequests

A. In General

B. Deferred Tax Payment Under § 6166

C. Generation-Skipping Transfer Tax Exemption

D. Alternate Valuation Election Under § 2032

E. State Death Taxes and Nondeductible Charges

F. Section 2057 Qualified Family-Owned Business Interest Deduction

G. Administration Expenses and the “Swing Item” Election

H. Summary

V. Marital Deduction Transfers: Qualification Requirements

A. In General

B. The Easy Qualification Requirements

1. In General

2. Need Not Be a U.S. Citizen or Resident

3. Decedent's Spouse Must Survive

a. Survivorship

b. Marital Status

4. Interest Must Be Includible in Decedent's Gross Estate and “Pass” to Surviving Spouse

a. Overview

b. Disclaimers

c. Controversy Involving Decedent's Estate Plan

d. The “Net Value” Rule

C. The Nettlesome Qualification Requirement: The Interest Must Be “Deductible”

1. Overview

2. Inclusion in Decedent's Gross Estate

3. Double Deductions Prohibited

4. The Nondeductible Terminable Interest Rule

a. In General

b. “Terminable Interest” Defined

c. Nondeductible Terminable Interests

5. The Unidentified Asset Rule

D. Exceptions to the Nondeductible Terminable Interest Rule

1. In General

2. Limited Survivorship Exception

VI. Marital Deduction Transfers: Forms of Dispositions

A. Special Dispositions That Qualify

B. Marital Deduction Power of Appointment Trust

1. Overview

2. General Power of Appointment

3. All Income Annually

a. In General

b. Administrative Provisions

c. Unproductive Property

d. Timing of Payments

4. Specific Portion Requirement

C. Legal Life Estate with General Power of Appointment

D. Life Insurance or Annuity Payments with General Power of Appointment

E. Estate Trusts


1. Overview

2. Requirements

a. In General

b. Passing

c. Qualifying Income Interest for Life

d. No General Power of Appointment Is Required

e. No Other Beneficiaries During Spouse's Overlife

f. The QTIP Election

3. Legal Life Estates Can Qualify for QTIP Treatment

4. The QTIP Election

a. In General

b. Remedying Defective Elections

c. Protective QTIP Elections

d. Authorizing the Election

5. Partial QTIP Elections

a. In General

b. Separate Shares Permitted

c. Paying Taxes from Nonelected Portion

d. Contingent Income

6. Inter Vivos QTIPs and Joint Settlor Revocable Trusts

7. Estate and Gift Tax Attributable to QTIP Trust

8. Annuities, Employee Benefit Payments, and Individual Retirement Accounts

9. Qualified Plan Spousal Annuity Issues

10. QTIP and Charitable Remainder Trusts


1. Overview

2. Citizenship Requirement

3. Exceptions

4. QDOT Qualification Requirements

5. Taxation of QDOTs

VII. Selecting and Drafting Marital Deduction Trusts

A. Selecting the Type of Marital Trust

1. Overview

2. Advantages of QTIPs

3. Advantages of Power of Appointment or Estate Trusts

a. In General

b. Elective Share Concerns

c. Better Mechanism for Inter Vivos Gifts

d. Permits Inter Vivos Assignment of Income

e. Time for Making Qualified Disclaimers

f. Rule Against Perpetuities Concerns

g. Income-Producing Property

4. A Combined Trust Plan

B. Drafting Considerations

1. Overview

2. Unproductive Property

3. Spendthrift Clause

4. Facility of Payment Clause

5. Delay in Funding Marital Trusts

6. Accumulated Income

7. Powers over Corpus

8. QTIP Trust Nongeneral Testamentary Power of Appointment

C. Marital Deduction “Savings Clauses”

VIII. Funding Marital Deduction Transfers

A. In General

B. Types of Marital Deduction Formula Clauses

1. Overview

2. Available Funding Mechanisms

3. Attorney Practices in the Choice of Funding Approaches

4. Importance of the Funding Decision

5. Factors Affecting Choice of Funding Approach

C. Funding the Pecuniary Marital - In General

D. True Worth Pecuniary

1. Overview

2. Advantages

a. Maximum Pick-and-Choose Flexibility

b. Spouse Protected Against Depreciation

c. Freezes Value of Marital Bequest

d. Relative Ease of Administration

3. Disadvantages

a. Potential Realization of Gain or Loss

b. Requires Revaluation of Assets

c. Distributions Carry Out DNI

d. Distributions May Accelerate IRD

e. The § 691(c) Deduction

f. Unused Losses Do Not Carry Over

4. True Worth Pecuniary Summary

E. Fairly Representative Pecuniary

1. Overview

2. Advantages

a. No Gain or Loss on Funding

b. Distributions Carry Out Less DNI

3. Disadvantages

a. Tends to Overfund or Underfund the Marital Bequest

b. Requires Revaluation of All Assets

c. Restricts Pick-and-Choose Flexibility

4. Fairly Representative Pecuniary Summary

F. Minimum Worth Pecuniary

1. Overview

2. Advantages

a. No Realization of Gain on Funding

b. Pick-and-Choose Flexibility

c. Only Distributed Assets That Have Decreased in Value Must Be Revalued

3. Disadvantages

4. Minimum Worth Pecuniary Summary

G. Funding the Reverse Pecuniary Marital - In General

1. Overview

2. Funding Options

3. True Worth Reverse Pecuniary

a. Legal Issues of Concern

b. Relevance of Rev. Proc. 64-19

4. Fairly Representative Reverse Pecuniary

5. Reverse Pecuniary Summary

H. Funding the Formula Fractional Share

1. In General

2. Preresiduary Versus True Residuary Fraction

3. Intersection with § 2057 Family-Owned Business Interest Deduction

I. Pro Rata Division of Assets

1. In General

2. Advantages

a. No Gain or Loss on Funding

b. No Rev. Proc. 64-19 Concerns

c. Income Tax Treatment

d. No Revaluation of Assets Required

e. No Fractious Disputes

3. Disadvantages

a. Tends to Overfund or Underfund the Marital Bequest

b. No Pick-and-Choose Flexibility

c. Capital Gain if Non-Pro-Rata Distributions Are Made

d. Difficult to Administer

4. Pro Rata Fractional Summary

J. Pick-and-Choose Fractional Share Funding

1. In General

2. Advantages

a. Maximum Flexibility with No Gain or Loss

b. No Rev. Proc. 64-19 Concerns

c. Income Tax Treatment

3. Disadvantages

a. Revaluation of All Assets

b. Uncertainties Surround the Pick-and-Choose Fractional

c. Marital Bequest Is Not Frozen

4. Pick-and-Choose Fractional Summary

K. Single Fund Marital

1. In General

2. Disadvantages

a. All Trust Income Must Be Distributed Annually

b. No Full Basis Adjustment for Any Asset

c. Administrative Problems

d. No Pick-and-Choose Flexibility

e. Allocation of GST Exemption

3. Single Fund Marital Summary

L. GST Tax Aspects of Marital Funding

M. Conclusions Regarding Marital Deduction Funding

N. Food for Thought - Funding with Split Interests

IX. Planning in Contemplation of Divorce

X. Planning in Contemplation of Marriage

XI. Ethics Considerations

XII. Planning for Unmarried Cohabitants

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Sample Power of Appointment Trust

Worksheet 2 Sample Qualified Terminable Interest Property Trust

Worksheet 3 Sample Single Fund Marital Provision

Worksheet 4 Summary of Estate Tax Marital Elections

Worksheet 5 Rev. Proc. 64-19, 1964-1 C.B. 682

Worksheet 6 Preamble to Final QTIP Regulations, T.D. 8522

Worksheet 7 Excerpts from Legislative Documents Accompanying the Revenue Act of 1948 (P.L. 471, 80th Cong., 2d Sess.), Relating to the Equalization of Tax Burdens of Residents of Community Property and Common Law States

Worksheet 8 Excerpts from Legislative Documents Accompanying the Internal Revenue Code of 1954 (P.L. 83-591, 83d Cong., 2d Sess.) Relating to the Estate Tax Marital Deduction (§ 2056)

Worksheet 9 Excerpts from Legislative Documents Accompanying 1966 Amendment to § 2056 (P.L. 89-621, 89th Cong., 2d Sess.) Relating to Disclaimers (§ 2518)

Worksheet 10 Excerpts from Legislative Documents Accompanying the Tax Reform Act of 1976 (P.L. 94-455, 94th Cong., 2d Sess.) Relating to § § 2056, 2523, and 2040

Worksheet 11 Excerpts from Legislative Documents Accompanying the Economic Recovery Tax Act of 1981 (P.L. 97-34, 97th Cong., 1st Sess.) Relating to § § 2040, 2044, 2056, 2207A, 2515, 2515A, 2519, 2523, and 6019

Worksheet 12 Excerpts from Legislative Documents Accompanying the Technical and Miscellaneous Revenue Act of 1988 (P.L. 100-647, 100th Cong., 2d Sess.) Relating to Bequests to Non-U.S. Citizen Spouses (§ § 2056 and 2056A)

Worksheet 13 Excerpts from Legislative Documents Accompanying the Revenue Reconciliation Act of 1989 (P.L. 101-239, 101st Cong., 1st Sess.) Relating to Bequests to Non-U.S. Citizen Spouses (§ 2056A)

Worksheet 14 Excerpts from Legislative Documents Accompanying the Revenue Reconciliation Act of 1990 (P.L. 101-508, 101st Cong., 2d Sess.), Relating to Bequests to Non-U.S. Citizen Spouses (§ § 2056, 2056A, and 2523). H.R. Rep. No. 894, 101st Cong., 2d Sess. (1990)

Worksheet 15 Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return Schedule M and Instructions

Worksheet 16 Selected Cases and Rulings Interpreting Marital Deduction Transition Date Rule

Worksheet 17 Selected Cases and Rulings Preceding Hubert Regulations




Legislative History:

Treasury Rulings:

































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