Issues Involved in Planning for a Spouse, Including “Marital Deduction Formulas”

Issues Involved in Planning fora Spouse, Including “Marital Deduction Formulas” Presented by: Lewis W. Dymond

Planning for a Spouse • Outright. • No Protection. • In Trust. • Creditor Protection. • Predator Protection. • Self Protection. • Estate Tax Protection.

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.

Marital and Non-Marital Shares

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.

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.

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.

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.

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 spouse’s estate. • Trust Protector may decant or grant testamentary GPOA. • Option to give spouse a demand right after 16 months.

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).

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.

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.

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).

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.

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.

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.

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.

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.

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.

Planning the Marital Share Marital Share – qualifying for the Unlimited Marital Deduction: • Outright to the surviving spouse. • General Power of Appointment Trust. • QTIP Trust.

Planning the Marital Share • Outright to the spouse. • Qualifies for the unlimited marital deduction. • Will be included in the surviving spouse’s estate; IRC §2033. • No lifetime protection. • Does not protect residuary beneficiaries.

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 spouse’s estate; IRC §2041.

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.

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.

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 spouse’s estate IRC §2044 only to the extend qualified for marital deduction.

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.

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 spouse’s applicable exclusion amount.

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.

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 spouse’s 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).

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.

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.

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?

Case Study #1

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.

Case Study #2

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.

Case Study #3

Issues Involved in Planning for a Spouse, Including “Marital Deduction Formulas”