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Contents

ForewordAcknowledgmentsIntroduction

Chapter 1 Brief History Of The Estate TaxAnd The Marital Deduction 1

§1.1 Historical Background Of The Federal EstateTax And The Marital Deduction 1

§1.2 Six Common Law States Adopt CommunityProperty 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-CommunityProperty Jurisdictions By EstablishingThe 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 TaxMarital 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 TheMarital Deduction General Power OfAppointment Trust 7(1) Advantages 7(2) Disadvantages 8

(c) Advantages And Disadvantages Of TheMarital Deduction Estate Trust 9(1) Advantages 9(2) Disadvantages 9

(d) Advantages And Disadvantages Of TheQTIP Marital Deduction Trust 9(1) Advantages 9(2) Disadvantages 10

(e) Advantages And DisadvantagesOf The Charitable Remainder MaritalDeduction Trust 11(1) Advantages 11(2) Disadvantages 11

§1.9 2001 Tax Act—Tentative Repeal Of TheFederal Estate Tax And Generation-SkippingTransfer 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 TheIncreasing 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(d) Certain Recapture Taxes Not Repealed 19(e) Exclusion Of Gain On Sale Of Decedent’s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 TaxMarital Deduction 23

§2.1 Seven Essential Requirements ForThe 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 ForSurviving Spouse 25(a) Decedent Need Not Be A U.S. Citizen

Or Resident 25

xiv • Drafting Marital Deduction Trusts

§2.5 Includable In Decedent’s Gross EstateRequirement 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 TerminableInterest 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) 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 InterestProperty 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

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(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 PartialElection Only 43

(b) Sample Partial QTIP Election ByFractional 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

xvi • Drafting Marital Deduction Trusts

(a) Disclaimers And General PowerOf Appointment Trust 55

(b) Third-Party Disclaimers 56§3.9 Payment Of Estate Tax On QTIP Trust 56

(a) Amount Of Estate Tax RecoverableBy Spouse’s Estate 56

(b) Gift Occurs Upon Failure To RecoverEstate 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) 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

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(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 AndThe 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 AppointmentMarital 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

xviii • Drafting Marital Deduction Trusts

(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 SurvivingSpouse’s Estate 81

§4.7 Sample General Power Of AppointmentMarital Deduction Trust 81

Chapter 5 Qualified Domestic Trusts ForThe Non U.S. Citizen Spouse 85

§5.1 Non U.S. Citizen Surviving SpouseAnd 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 TrustInto A QDOT 89

§5.4 Transfer Of Property by Surviving SpouseTo 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

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(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 QDOTSecurity 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 ForEstates 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 ExcludeValue 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

xx • Drafting Marital Deduction Trusts

§5.14 Summary Of Special QDOT Election IfSpouse 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 AndThe 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 AffectThe Marital Deduction Trust 117

§7.1 Allocation Of Income And Expenses 117(a) RUPIA 117

§7.2 Payment Of Estate Administration ExpensesAnd Claims—The Hubert Regulations 118(a) Background 118(b) New Regulations Issued 119

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(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 EstateManagement Expenses 127

(2) Where To Deduct Estate ManagementExpenses 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 ATransmission Expense Or AManagement Expense? 140

(2) Why Does It Matter Whether AnExpense Is Characterized As ATransmission Expense OrA Management Expense? 140

(3) Will Management ExpensesBe Significant? 140

(4) Should Commissions And CounselFees Be Allocated BetweenTransmission And ManagementExpenses? 140

(5) Where Should Expenses Be Deducted? 141(6) What Is The Impact On The

Selection Of A Marital DeductionFormula? Do The RegulationsMake One Formula More AttractiveThan 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

xxii • Drafting Marital Deduction Trusts

(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 AdministrationOf 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 OrderTo Ensure The Availability Of TheMarital 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 RegardingThe 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

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(d) Co-Trustee With Substantial AdverseInterest 160

(e) Beneficiary-Trustee’s Power Of Withdrawal 162(1) Lapse Of Power Of Withdrawal 162

(f) Beneficiary-Trustee’s Ability To RemoveAnd 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 PowerOf 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 OfCo-Trustee 166

§9.4 Distributions That Discharge A Trustee’sPersonal 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 TheSurviving 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

xxiv • Drafting Marital Deduction Trusts

(c) Duty To Administer The Trust WithReasonable Skill And Care 174

(d) Prudent Investor Rule 174(e) Duty To Give Notices, Furnish

Information, And Communicate WithThe Trust Beneficiaries 174

(f) Duty To Collect, Control And UseReasonable Care And Skill To PreserveAnd 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) 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-TrusteeOf The Credit Shelter Trust 180

§10.7 Use Of Independent Trustee For MaritalAnd Credit Shelter Trusts 180

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(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 TrusteeAs Co-Trustees 181

Chapter 11 Drafting Flexibility Into MaritalDeduction Trusts And Credit Shelter Trusts 183

§11.1 Designing Flexible Estate Plans UnderThe 2001 Tax Act 183

§11.2 All To Surviving Spouse In A DivisibleQTIP Marital Deduction Trust With A PartialQTIP Election 184

§11.3 All To Surviving Spouse In A QTIP MaritalDeduction Trust With Clayton ContingentQTIP 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 RightTo 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

xxvi • Drafting Marital Deduction Trusts

(n) Clayton Contingent QTIP vs. DisclaimerApproach 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 LimitedPowers 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 LifeInsurance 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 PlanningWith 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

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(g) Divide QTIP Trust Before Disclaiming 212§12.7 Use Of QTIP Trust For Asset Protection 212

(a) Distribution Of Income During SurvivingSpouse’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 InsolventDisclaimant-Spouse 215

(g) Gift To Inter-Vivos QTIP With RetainedSecondary Life Interest 216

(h) Naming A QTIP Trust As The BeneficiaryOf A Retirement Account 217

(i) Payment Of Taxes On Assets In ReverseQTIP Trust From An Outside Source 218

§12.8 Use QTIP And Credit Shelter Trust AssetsTo Form Family Limited Partnership 218

§12.9 Disclaimer Based GST Tax Planning ForThe Surviving Spouse’s Estate 220

§12.10 Use QTIP Total Return Trust ForSecond-Marriage Situations 221

§12.11 Use Inter-Vivos QTIP Trust To AvoidState Death Taxes 223

§12.12 Estate Tax Friendly Divorce Planning UsingAn Alimony Trust 223

Chapter 13 Generation-Skipping Transfer Tax IssuesAnd 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

xxviii • Drafting Marital Deduction Trusts

§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 GenerationAssignments 236(a) Generation Assignments Summarized 236

§13.9 Predeceased Parent Rule And GenerationAssignments 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 TransferorMove-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

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(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 TreatedAs Having Separate Shares For GSTTax Purposes 251(1) Existence Of Shares Requirement 254(2) Allocation Requirement 254

(b) Severance Of A Separate Share FromA Single Trust 254(1) Requirements For A Fractional

Severance Of A SeparateShare From A Single Trust 254

(2) Requirements For A MandatoryPecuniary Severance OfA Separate Share From A Single Trust 255

(c) Four Requirements For Payment Of APecuniary Bequest To Be Treated As ASeparate 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 ConcerningPayment Of A Pecuniary Bequest BeingTreated As A Separate Share For GSTTax Purposes Automatically Results InCompliance With The GST TaxValuation Rules 258

§13.21 The GST Tax Separate Trust Rule 259(a) Two Requirements For Dividing

(On A Mandatory Basis) A Single TrustInto 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 ADiscretionary Basis) A Single Trust Into SeparateTrusts For GST Tax Purposes 261

xxx • Drafting Marital Deduction Trusts

(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 SeveredTrusts Requirement 262

(B) Pecuniary Funding Of SeveredTrusts Requirement 262

(c) Minimum-Worth Marital DeductionFunding Formula 262

(d) Compliance With The RequirementsFor A Discretionary Severance UnderThe Separate Trust Rule AutomaticallyResults In Compliance With The GST TaxValuation Rules 263

(e) Mandatory Severance Of Trusts IsPreferable Over Discretionary SeveranceOf Trusts 264

§13.22 The GST Tax Valuation Rules 264(a) Two Valuation Rules Apply For Allocation

Of GST Tax Exemption To A PecuniaryBequest Payable At Death 265(1) First Valuation Rule—Requirement

For Allocation Of GST Tax ExemptionTo A Pecuniary Bequest PayableSolely In Cash 265

(2) Second Valuation Rule—RequirementsFor Allocation Of GST Tax ExemptionTo A Pecuniary Bequest Payable WithNoncash Property 266

(b) Two Valuation Rules Apply For AllocationOf GST Tax Exemption To ResidueFollowing A Pecuniary Bequest PayableAt Death 268(1) First Valuation Rule—A Pecuniary

Bequest Satisfied In Cash Or In Kind(Preceding The GST Transfer) MustReceive Appropriate Interest 269

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(2) Second Valuation Rule—A PecuniaryBequest Satisfied With Noncash Assets(Preceding The GST Transfer) MustBe Funded Using The Assets’Date-Of-Distribution Value Or InA Manner Fairly Representative Of TheAssets’ Appreciation And Depreciation 270

(c) Compliance With The Separate TrustDiscretionary Severance Rules AutomaticallyResults In Compliance With TheValuation Rules 271

§13.23 Using Fractional And Pecuniary FormulasTo Create GST-Tax-Exempt Trusts 272

§13.24 Mandatory or Discretionary DivisionOf QTIP Trust By Trustee For GST Tax Purposes 273

§13.25 Discretionary Division Of Trusts By TrusteeFor GST Tax Purposes 273

§13.26 Automatic Allocation Of GST Tax ExemptionUpon 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 GSTTax-Exemption Allocation 285

§14.4 IRS May Grant Extension Of Time To Make ATimely 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 FormulasAnd Their Tax Consequences 289

xxxii • Drafting Marital Deduction Trusts

§15.1 Two Basic Types Of Marital DeductionFunding 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 DeductionFunding 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 OfIncome 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

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§15.6 The Minimum-Worth Marital DeductionFunding 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 MaritalTrust Amount To Fluctuate In Value 339

(c) Fractional Funding Formulas Do NotAccelerate Recognition Of IRD 339

(d) DNI Issues 340(e) Special Election To Recognize Gain Or

Loss On Funding 340

xxxiv • Drafting Marital Deduction Trusts

(f ) GST Tax Exemption Issues 340(g) Disproportionate Non-Simultaneous Funding

Distributions Require RecomputationOf Fraction 341

§15.10 The Pro-Rata Fractional Marital DeductionFunding 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 AndDisadvantages Of The Seven MaritalDeduction Funding Formulas 349

§16.1 Advantages And Disadvantages Of TheTrue-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 DeductionFunding Formula 352(a) Advantages 352(b) Disadvantages 353(c) Summary 354

§16.3 Advantages And Disadvantages OfThe Minimum-Worth Marital DeductionFunding 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 FairlyRepresentative Credit Shelter Funding Formula 358

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(a) Advantages 358(b) Disadvantages 359(c) Summary 360

§16.6 Advantages And Disadvantages Of The Pro-Rata Fractional Marital DeductionFunding Formula 360(a) Advantages 360(b) Disadvantages 361(c) Summary 362

§16.7 Advantages And Disadvantages Of The PickAnd Choose Fractional Marital DeductionFunding Formula 362(a) Advantages 362(b) Disadvantages 363(c) Summary 364

Chapter 17 Summary Of Marital Deduction FundingFormulas (With Checklist And Chart) 365

§17.1 Summary Of Marital Deduction PecuniaryFunding 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

xxxvi • Drafting Marital Deduction Trusts

§18.2 Sample Inter-Vivos QTIP Marital DeductionTrust Form 379

Appendix 1 Sample Marital Deduction Trust Form 381Appendix 2 Sample Inter-Vivos QTIP Marital Deduction

Trust Form 473Appendix 3 The Final Minimum Distribution Rules For IRAs

(And Their Impact On Trusts) 543Appendix 4 Decision Tree: Precuniary Payment From

A Transferor’s Inter-Vivos Trust 579Appendix 5 Decision Tree: GST Tax Separate Share Rule 580Appendix 6 Decision Tree: Determining Separate Trusts 581Appendix 7 Decision Tree: Determining The Denominator

Of The Applicable Fraction In A PecuniaryBequest Situation 582

Appendix 8 Decision Tree: Determining the DenominatorOf the Applicable Fraction In A ResiduaryTransfer Situation 583

Table of Cases 585Table of Statutes, Rules, and Regulations 591Index of Subjects 609

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