Issues Involved in Planning for a Spouse, Including Marital
Deduction Formulas Presented by: Lewis W. Dymond
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Planning for a Spouse Outright. No Protection. In Trust.
Creditor Protection. Predator Protection. Self Protection. Estate
Tax Protection.
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Marital and Non-Marital Shares Why do we do it? Fact-based
reasons. Marital Share - provide for surviving spouse. Non-Marital
Share - family planning purposes. Estate tax and state death tax
reasons. To maximize use of both spouses applicable credit amount
(Unified Credit). Marital Share qualify for marital deduction.
Non-Marital Share shelter applicable exclusion amount.
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Marital and Non-Marital Shares
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Review of the Options All to the Marital Share: Generally
non-taxable estate and not likely to be a taxable estate at death
of survivor. Desire to provide for the surviving spouse during his
or her life and then to the residuary beneficiaries. Tax planning
can be available by designing the Marital Share as a QTIP (one lung
QTIP). Include demand right after 6 months. Trust Protector can
decant or grant a testamentary general power of appointment.
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Review of the Options All to Marital Share, with any disclaimed
amounts going to the Non-Marital Share: A wait and see strategy.
May have a need to use the applicable credit amount coupon of first
spouse to die. Depends on surviving spouse disclaiming to fund the
Non-Marital share (use the coupon). Spouse cannot have a limited
testamentary power of appointment in the Bypass Trust. $.3M to
$3M.
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Review of the Options Stated percentage or fraction to Marital
Share: Not tax motivated; fact driven. Use where you want the
surviving spouse to have a stated percentage which will qualify for
the marital deduction. Balance will usually go directly to the
residuary beneficiaries.
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Review of the Options Clayton Election ($.5M - $7M): A wait and
see strategy. Everything allocated to a QTIP; however anything
elected out of QTIP treatment on a 706 allocated to the Non-Marital
Share. Not a disclaimer: May have a testamentary limited power of
appointment. Spouse should not make the election on the 706.
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Review of the Options Clayton Election (Caveat): If no 706
filed: All will be in the QTIP. QTIP will not be included in the
surviving spouses estate. Trust Protector may decant or grant
testamentary GPOA. Option to give spouse a demand right after 16
months.
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Review of the Options Pecuniary Marital Formula: A mandatory
funding formula; must fund Non- Marital Share. Solves for the
smallest specific dollar amount to the Marital Share using date of
death values that will reduce federal estate taxes to the lowest
possible amount. Option to allocate a minimum dollar amount to the
Marital Share. Option to adjust formula to reduce to lowest overall
death taxes (federal estate and state death taxes).
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Review of the Options Pecuniary Marital Formula: Generally not
recommended because funding of pecuniary amount accelerates
recognition of IRD. May want to use when you want to guarantee that
the applicable credit amount of first spouse to die will be used
(estates over $2M). And there are likely to be no IRD assets.
Simplicity of calculating and funding.
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Review of the Options Fractional Marital Formula: A mandatory
funding formula; must fund Non- Marital Share. Solves for the
smallest fractional amount to the Marital Share using date of death
values that will reduce federal estate taxes to the lowest amount.
Numerator = Amount of available exemption amount. Denominator =
Date of death value of remaining property. No recognition of
gain.
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Review of Options Fractional Marital Formula: Option to
allocate a minimum fractional amount to the Marital Share. Options
to adjust formula to reduce to lowest overall death taxes (2
QTIPs). Recommended when you want to guarantee that the applicable
credit amount of first spouse to die will be used (estates over
$2M).
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Review of the Options Credit Shelter Pecuniary: A mandatory
funding formula; must fund Non- Marital Share. Solves for the
largest pecuniary amount to the Non-Marital Share, using date of
death values, that can pass estate tax free. Option to adjust
formula to reduce to lowest overall death taxes.
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Review of the Options Credit Shelter Pecuniary: Best formula
for very large estates (> $30M) where the pecuniary amount can
be easily calculated and satisfied quickly with cash or easy to
value assets. Sufficient liquid assets to fund the applicable
credit amount.
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Review of the Options Statutory minimum to Marital Share: Not
tax motivated. Allocates to the Marital Share only what the spouse
would receive if he or she exercised his or her right to elect
against the estate plan. Must make sure that the distribution of
the Marital Share qualifies for satisfaction of the spousal
election.
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Review of the Options Statutory minimum to Marital Share:
Normally, the Non-Marital Share would go straight to the residuary
beneficiaries. Use where there is a concern the spouse will
exercise the spousal election.
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Review of the Options None to the Marital Share, spouse is
disinherited: Not tax motivated. There is no division into Marital
and Non- Marital Share. Option in WealthDocx to remove spouse from
priority role.
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Review of the Options None to the Marital Share, spouse is
disinherited: Spouse can be provided for by means of a specific
pre-residuary distribution (e.g. SNT for spouse). If disinheriting
spouse, should have a pre- nuptial agreement. Otherwise use the
statutory minimum to the marital share.
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Planning the Marital Share Marital Share qualifying for the
Unlimited Marital Deduction: Outright to the surviving spouse.
General Power of Appointment Trust. QTIP Trust.
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Planning the Marital Share Outright to the spouse. Qualifies
for the unlimited marital deduction. Will be included in the
surviving spouses estate; IRC 2033. No lifetime protection. Does
not protect residuary beneficiaries.
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Planning the Marital Share General Power of Appointment Trust:
All income distributed to spouse. Discretionary distribution of
principal by Trustee. Spouse can demand all or any portion of
principal at any time. Spouse has an unlimited testamentary general
power Included in surviving spouses estate; IRC 2041.
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Planning the Marital Share General Power of Appointment Trust:
Limited, if any, creditor protection. Perhaps some predator
protection. Limited, if any, self-protection. Not a separate
taxable entity from surviving spouse.
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Planning the Marital Share QTIP Trust: All income distributed
to spouse and spouse must be sole beneficiary. Spouse can demand
property be invested for income. Optional discretionary
distribution of principal by Trustee. Optional 5 and 5 power.
Optional limited testamentary power of appointment.
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Planning the Marital Share QTIP Trust: Optionally qualifies for
unlimited marital deduction because spouse does not have a general
power of appointment. A separate taxable entity from surviving
spouse. Included in surviving spouses estate IRC 2044 only to the
extend qualified for marital deduction.
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Planning the Marital Share QTIP Trust: Full trust protection,
except for income. Protection for residuary beneficiaries. Option
to give spouse demand right after 16 months. Converts to a general
power of appointment trust. No longer a separate taxable entity.
Loss of most creditor, predator and self protection. Loss of
protection for residuary beneficiaries.
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Planning the Non-Marital Share Non-Marital Share does not
qualify for the Unlimited Marital Deduction Generally avoids estate
tax on death of first spouse to die by being limited in amount to
the deceased spouses applicable exclusion amount.
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Planning the Non-Marital Share Distributed in a manner that
will avoid estate tax on the death of the surviving spouse: Bypass
trust for the surviving spouse. Skip spouse and go straight to the
residuary beneficiaries.
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Planning the Non-Marital Share Bypass Trust for the surviving
spouse. Does not have to qualify for unlimited marital deduction.
Must be designed inclusion in the surviving spouses estate; avoid
2041 inclusion. Spouse does not have to be sole beneficiary. Spouse
only. Spouse and descendants. Spouse, descendants and named
individual(s). Spouse and named individual(s).
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Planning the Non-Marital Share Bypass Trust for the surviving
spouse. All income or discretionary income. Optional discretionary
principal. Optional 5 and 5 power. Optional lifetime limited power
of appointment. Optional testamentary limited power of appointment.
Provides full trust protection. Protection for descendants.
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Case Study #1 Tom and Cindy Client Ages 80 and 78 respectively.
Married 60 years. 3 adult children: Peter, Paul and Mary; all
responsible. Total estate $300,000 all owned jointly.
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Case Study #1 Design for Tom and Cindy Client Issues and
considerations? Type of revocable living trust? Marital formula
option? Distribution of Marital Share? Distribution of Non-Marital
Share? Distribution of residuary?
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Case Study #1
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Case Study #2 Tom and Cindy Client. Both age 50. Married 26
years. 3 children: Peter age 24, Paul age 20; Mary age 15. Total
estate $500,000.
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Case Study #2 Design for Tom and Cindy Client Issues and
considerations? Type of revocable living trust? Marital formula
option? Distribution of Marital Share? Distribution of Non-Marital
Share? Distribution of residuary?
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Case Study #2
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Case Study #3 Tom and Cindy Client. Both age 50. Married 26
years. 3 children: Peter age 24, Paul age 20; Mary age 15. Total
estate $1,500,000.
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Case Study #3 Design for Tom and Cindy Client Issues and
considerations? Type of revocable living trust? Marital formula
option? Distribution of Marital Share? Distribution of Non-Marital
Share? Distribution of residuary?
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Case Study #3
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Case Study #4 Tom and Cindy Client. Ages 60 and 58
respectively. Married 35 years. 3 children: Peter age 32, Paul age
30; Mary age 27. Total estate $8,000,000.
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Case Study #4 Design for Tom and Cindy Client Issues and
considerations? Type of revocable living trust? Marital formula
option? Distribution of Marital Share? Distribution of Non-Marital
Share? Distribution of residuary?
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Case Study #4
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Case Study #5 Tom and Cindy Client. Ages 60 and 38
respectively. Married 5 years. Tom has 3 children: Peter age 32,
Paul age 30; Mary age 27. Cindy has 1 child: Sara age 15. Toms
total estate $3,500,000. Cindys total estate $500,000.
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Case Study #5 Design for Tom and Cindy Client Issues and
considerations? Type of revocable living trust? Marital formula
option? Distribution of Marital Share? Distribution of Non-Marital
Share? Distribution of residuary?
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Case Study #5 Design for Tom
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Case Study #5 Design for Tom
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Case Study #5 Design for Tom
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Case Study #5 Design for Tom
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Case Study #5 Design for Tom
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Case Study #5 Design for Tom
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Case Study #5 Design for Tom
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Case Study #5 Design for Cindy
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Case Study #5 Design for Cindy
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Case Study #5 Design for Cindy
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Case Study #5 Design for Cindy
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Case Study #5 Design for Cindy
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Case Study #5 Design for Cindy
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Case Study #5 Design for Cindy
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Case Study #6 Tom and Cindy Client. Ages 60 and 38
respectively. Married 5 years. Tom has 3 children: Peter age 32,
Paul age 30; Mary age 27. Cindy has 1 child: Sara age 15. Toms
total estate $60,000,000. Cindys total estate $3,000,000.
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Case Study #6 Design for Tom and Cindy Client Issues and
considerations? Type of revocable living trust? Marital formula
option? Distribution of Marital Share? Distribution of Non-Marital
Share? Distribution of residuary?
