Marital Deduction Revocable Trusts: Funding Formulas to ... Oct 02, 2013 آ  Marital...

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  • Marital Deduction Revocable Trusts: Funding Formulas to Minimize Tax and Maximize Spousal Benefits Selecting, Structuring, and Applying Pecuniary Marital, Non-Marital and Fractional Share Formulas

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    Presenting a live 90-minute webinar with interactive Q&A

    David M. Grant, Partner, Grant Morris Dodds, Henderson, Nev.

    Mark L. Dodds, Partner, Grant Morris Dodds, Henderson, Nev.

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    Presented by:

    Mark L. Dodds, Esq., LLM & David M. Grant, Esq., MAcc

    © 2013 by Grant Morris Dodds, PLLC, all rights reserved. This outline is not designed nor intended to provide specific legal, investment, or other professional advice because such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.

  • The Unlimited Marital Deduction

    Marital Deduction Revocable Trusts

    • Tax Free Transfers between Spouses. This deduction allows for tax free transfers of unlimited amounts of assets between spouses during life and at death.

    • Results in Deferral of Estate Tax. The result is that the

    surviving spouse does not have to pay any tax on the estate of the first spouse to die. In other words, the marital deduction postpones the federal estate tax.

    • Example. As an example, Bill Gates can pass to Melinda Gates $70 billion in assets, or vice versa, so long as they are married at the time of the transfer, free of transfer tax until the passing of the last of them to die.


  • QTIP Trusts

    Marital Deduction Revocable Trusts

    • What is a terminable interest? Basically, it is an interest in property that can expire due to the passage of time, or that can terminate due to the occurrence of some future event. Generally terminable interests left to spouses cannot qualify for the marital deduction.

    • Exception for QTIP Trusts. If an interest in a trust is terminable, it may still qualify if it meets certain requirements.

    • Purpose of a QTIP Trust. To control the ultimate disposition of a decedent’s property, while still having a transfer to the QTIP Trust qualify for the marital deduction, thereby deferring (if not altogether getting rid of) transfer tax.


  • QTIP Election Required

    Marital Deduction Revocable Trusts

    The tax code permits the estate’s executor to claim the marital deduction for amounts transferred to a QTIP trust by making an irrevocable election on the decedent’s Federal estate tax return (or by the Donor on a gift tax return for lifetime QTIP transfers).


  • QTIP Requirements

    Marital Deduction Revocable Trusts

    • In General. Property passing to a QTIP will qualify for the marital deduction so long as the surviving spouse has a lifetime income interest in the property.

    • The Rule. IRC Section 2056(b)(7) states that QTIP property means property:

    (1) which passes from the decedent, (2) in which the surviving spouse has a qualifying income interest for life, and (3) to which an election under this paragraph is made.

    • Powers of Appointment. Moreover, ALL income must go to the spouse

    for life, and it must be payable annually or in more frequent intervals. In order to qualify for the marital deduction, no person (not even the spouse) may have a power of appointment over any part of the QTIP property to appoint to anyone other than to the surviving spouse.


  • Inter Vivos QTIP Trusts

    Marital Deduction Revocable Trusts

    • Common Estate Planning. Generally when planning for spouses of unequal wealth the wealthy (or propertied) spouse transfers assets to the non- wealthy (or non-propertied) spouse in order to efficiently absorb both spouses' unified credits and GST exemptions.

    • Problem when non-wealthy Spouse dies first. While testamentary QTIP planning under IRC Section 2056(b)(7) can provide an avenue for efficient use of both spouses' exemptions, it is ineffective where the non-propertied spouse passes first. If the non-propertied spouse predeceases owning no (or insufficient) property, his or her transfer tax exemptions are wasted because ownership of the property is required for it to be estate taxable.

    • Lifetime Gifting may provide the Solution. Therefore, gifting property to the non-propertied spouse during life is necessary to capture the transfer tax exemptions of both spouses regardless of who dies first. IRC Section 2523(f) allows the propertied spouse to make a tax-free gift to his or her spouse through an irrevocable QTIP trust created during life. Like its testamentary counterpart, an inter vivos QTIP election treats the donee spouse as the transferor of the QTIP thus subjecting the transferred property to estate tax at the donee spouse's death or to gift tax upon disposition of the property during life.


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  • Life Estate with Power of Appointment (LEPA) Trust

    Marital Deduction Revocable Trusts

    IRC Section 2056(b)(5) provides that if an interest in property passes from the decedent to his surviving spouse (whether or not in trust) and the spouse is entitled for life to all the income from the entire interest or all the income from a specific portion of the entire interest, with a power in her to appoint the entire interest or the specific portion, the interest which passes to her is a deductible interest.


  • Requirements of a LEPA

    Marital Deduction Revocable Trusts

    To be deductible, a transfer to a LEPA must satisfy all five of the conditions set forth below:

    • The surviving spouse must be entitled for life to all of the income from the entire interest or a specific portion of the entire interest, or to a specific portion of all the income from the entire interest.

    • The income payable to the surviving spouse must be payable annually or at more frequent intervals.

    • The surviving spouse must have the power to appoint the entire interest or the specific portion to either herself or her estate.

    • The power in the surviving spouse must be exercisable by her alone and (whether exercisable by will or during life) must be exercisable in all events.

    • The entire interest or the specific portion must not be subject to a power in any other person to appoint any part to any person other than the surviving spouse.


  • A Note on Long Stable Marriages

    Marital Deduction Revocable Trusts