CH 10 Unlimited Marital Deduction Flashcards

Question

Given only the following information, which would qualify for the estate tax unlimited marital deduction? Property transferring to a surviving spouse as beneficiary of an irrevocable trust created six years ago. At the time of the trust’s creation, the gift was complete, but the decedent did not pay any gift tax as the only beneficiary of the trust was the decedent’s spouse. A bequest of 2,000 shares of Holiday Incorporated stock to a surviving spouse. The surviving spouse is a U.S. citizen. The bequest of the life estate interest in a home to the surviving spouse. The decedent bequeathed the remainder interest to his children. A bequest of property with a fair market value of $10,000 to a surviving spouse. The surviving spouse disclaims the interest and the property transfers to the decedent’s residual heirs, his children.

Answer 1

A bequest of 2,000 shares of Holiday Incorporated stock to a surviving spouse. The surviving spouse is a U.S. citizen. Rationale For a transfer to qualify for the estate tax unlimited marital deduction, the property interest must meet three requirements. First, the property must be included in the decedent’s gross estate. Second, the property must be transferred to the surviving spouse who is a U.S. citizen. Third, the interest must not be a terminable interest. Utilizing only the information in each of the above options, only option b describes property that would qualify for the unlimited marital deduction. The property is included in the decedent’s gross estate, transfers to the surviving spouse, the surviving spouse is a U.S. citizen, and the property interest transferred is outright ownership, not a terminable interest. Option a is incorrect as a completed transfer of property to an irrevocable trust is not included the decedent’s gross estate, and therefore will not qualify for the unlimited estate tax marital deduction. Option c is incorrect as the interest transferred is a terminable interest. Option d is incorrect because the surviving spouse disclaims the interest and the property transfers to the decedent’s children. To qualify for the unlimited marital deduction, the surviving spouse must inherit the property.

Answer 2

The marital deduction is unlimited. Rationale An individual is generally permitted to leave an unlimited amount of property to their U.S. citizen spouse at death without incurring any federal estate tax. For a transfer to qualify for the marital deduction, the property interest must meet three requirements. First, the property must be included in the decedent’s gross estate. Second, the property must be transferred to the surviving spouse. Third, the interest must not be a terminable interest.

Answer 3

The GPOA Trust automatically qualifies for the unlimited marital deduction because Juan’s wife has a general power of appointment over the trust’s assets. Rationale The GPOA Trust gives Juan’s wife a general power of appointment over the trust’s assets and the ability to appoint the assets to herself, her creditors, or to anyone on her behalf. A GPOA trust that gives the surviving spouse these rights will qualify for the unlimited marital deduction. Option a is incorrect because the trustee of the GPOA Trust does not have any influence on Juan’s wife’s general power of appointment over the trust’s assets. Option b is incorrect because Juan’s wife can appoint the assets of a GPOA Trust to herself, her creditors, or anyone on her behalf. Option c is incorrect because Juan’s wife has a current right to the GPOA Trust’s assets through her general power of appointment.

Answer 4

2 and 3. Rationale Statement 2 is eligible for the marital deduction because the executor made a QTIP election on the property. Statement 3 is eligible for the marital deduction because at the time of the distribution, the spouse was a U.S. citizen. Statements 1 and 4 are not eligible for the marital deduction because if the spouse is a nonresident or noncitizen, a QDOT must be used for a transfer to qualify for the marital deduction. The CRAT in statement 1 does not qualify as a QDOT because the trustee is not a U.S. citizen.

Answer 5

$1,140,000. Rationale Since Janice and Chandler own the property as community property, each is deemed to own 1/2 of the property. In this case, Janice would include $14,750,000 in her federal gross estate. The three specific bequests totaling $1,350,000 are directed to non-spouse beneficiaries and are taxable transfers which, including the bypass trust, will utilize the applicable estate tax credit. The bypass trust will receive $12,260,000 ($13,610,000 - $1,350,000), an amount necessary to utilize any remaining available applicable estate tax credit and will not qualify for the marital deduction. Chandler will receive the remainder of $1,140,000, which will be eligible for the marital deduction. $14,750,000 Total Estate ($1,350,000) Specific Bequests ($12,260,000) Bypass Trust $1,140,000 Marital Deduction No estate tax will be due because only an amount equal to the applicable estate tax credit equivalency transfers outside of the marital deduction. The marital deduction on Janice’s estate tax return is $1,140,000 (the gross estate of $14,750,000 reduced by the specific bequests of $1,350,000 and the additional amount transferred to the bypass trust ($12,260,000)).

Answer 6

9 months. Rationale In order for a disclaimer to be qualified, the disclaimer must be in writing, must be filed within nine months of the decedent’s date of death, and the disclaimant must not have benefited from the disclaimed inheritance.

Answer 7

$17,500,000. * Since the debts and expenses are payable from the residuary of the estate, the marital deduction is equal to the specific bequest to the surviving spouse. * An allocation of the debts, expenses, and taxes only offsets the marital deduction when the surviving spouse is the residuary beneficiary or the will directs the bequest to the surviving spouse to bear the debts, expenses, and taxes attributable to their share.

Answer 8

A bypass trust aids in guaranteeing the full use of an individual’s applicable estate tax credit. Rationale A bypass trust is generally created in a will to receive, at the decedent’s date of death, the amount of property necessary to utilize the decedent’s available applicable estate tax credit. By creating this trust in their will, the decedent is ensuring that the applicable estate tax credit will be utilized. Options a and b are the definitions of an “underqualified” and “overqualified” estate. The definitions are reversed in each answer. Option d is an incorrect statement. An estate that does not take advantage of its available applicable estate tax credit is transferring assets at a higher overall estate tax cost than necessary. In other words, the assets that are sheltered under the marital deduction could have transferred estate tax free to other heirs by utilizing the applicable credit.

Answer 9

Qualified Domestic Trust (QDOT). Rationale In order to use the unlimited marital deduction for any transfers to Rosa, Jeremy would have to create a Qualified Domestic Trust (QDOT). A QDOT will allow the U.S. government to subject any assets remaining at Rosa’s death to estate taxation. In order to qualify the QDOT for the unlimited marital deduction, the following requirements must be met: 1. At least one of the QDOT trustees must be a U.S. citizen or U.S. domestic corporation. 2. The QDOT must prohibit a distribution of principal unless the U.S. citizen trustee has the right to withhold estate tax on the distribution. 3. The trustee must keep a sufficient amount of the trust assets in the U.S. to ensure the payment of federal estate taxes, or the trustee must have a minimum net worth sufficient to assure the payment of estate taxes upon Rosa’s death. 4. Jeremy’s executor must elect to have the marital deduction apply to the trust.

Answer 10

In his will, Joey funds a trust with $13,610,000 for the benefit of his two children. Phoebe will receive an annual income distribution from the trust. All other assets will transfer to Phoebe. Rationale Answer A Answer B Answer C Answer D Assets in Joey's Gross Estate $17,000,000 $17,000,000 $17,000,000 $17,000,000 Unlimited Marital Deduction ($17,000,000) ($3,390,000) ($16,450,000) ($16,500,000) Taxable Estate $0 $13,610,000 $550,000 $500,000 Estate Tax $0 $5,389,800 $174,300 $155,800 Applicable Estate Tax Credit N/A ($5,389,800) ($174,300) ($155,800) Estate Tax Due $0 $0 $0 $0 Assets in Phoebe's Gross Estate $17,000,000 $3,390,000 $16,450,000 $16,500,000 Estate Tax $6,745,800 $1,301,800 $6,525,800 $6,545,800 Applicable Estate Tax Credit ($5,389,800) ($1,301,800) ($5,389,800) ($5,389,800) Estate Tax Due $1,356,000 $0 $1,136,000 $1,156,000 As depicted in the table above, Scenario b provides the lowest overall federal estate taxes because the maximum assets are transferred utilizing the available applicable estate tax credit at Joey’s death, since portability is not elected.

Answer 11

The executor of Dexter’s estate made the QTIP election for the bequest of a life estate interest in his personal residence to Morgan, Dexter’s wife. Rationale Only the property interest detailed in option b would qualify for the marital deduction. Even though a life estate is a terminable interest, which is normally not eligible for the marital deduction, the QTIP election on the property qualifies the transfer for the marital deduction. Option a does not qualify for the unlimited marital deduction because the property does not transfer to the surviving spouse. Morgan only holds an interest as trustee for Dexter’s children. Option c does not qualify for the unlimited marital deduction because the survivorship clause cannot require the spouse to survive the decedent by more than six months. Option d does not qualify for the unlimited marital deduction because the surviving spouse cannot act alone to exercise the general power of appointment. To qualify the surviving spouse must be able to exercise the general power of appointment alone.

Answer 12

The right to appoint the assets of the trust to themselves, their creditors, or anyone they desire will not create an interest which will cause inclusion of the trust’s assets in the surviving spouse’s gross estate. Rationale Option d describes a general power of appointment over the trust’s assets. Anyone dying with a general power of appointment over the assets of a trust will include the fair market value of the trust’s assets in his gross estate. Options a, b, and c are correct statements.

Answer 13

Disclaimer. Rationale A qualified disclaimer allows an individual to refuse property from the estate of a decedent. A bypass trust maximizes the use of the available applicable estate tax credit at the death of the first-to-die spouse. The exclusion clause and rejection do not exist.

Answer 14

If the executor makes a QTIP election on the house, the house is not included in the decedent’s taxable estate. Rationale Option d is a true statement. Option a is a false statement. If the decedent’s spouse disclaims their interest in the property, the property will transfer to the children without being subject to the surviving spouse’s life estate. In this case, the transfer would not be eligible for any deductions and would be fully included in the decedent’s taxable estate. Option b is a false statement. If the children disclaim their outright ownership in the house, the outright ownership of the property will transfer according to the disclaimer clause in the will. If the will does not include a disclaimer clause, the outright ownership of the house will transfer according to the residuary heirs of the estate. Option c is a false statement. A QTIP election will not qualify a bequest to a non-U.S. citizen spouse for the unlimited marital deduction. Only a transfer to a qualifying QDOT will qualify a bequest to a non-U.S. citizen spouse for the unlimited marital deduction.

Answer 15

Gunner’s estate is entitled to be reimbursed for any estate tax paid by the estate on assets held in the QTIP trust. Rationale The QTIP is liable for its proportional share of any estate tax and will have to reimburse the estate. The taxes will be the same regardless of whether paid from estate assets or QTIP assets.

Answer 16

The surviving spouse’s right to the trust property must be limited to an ascertainable standard, such as health, education, maintenance, and support. Rationale Options a, b, and d are the requirements for a general power of appointment trust to be eligible for the unlimited marital deduction. Option c does not describe a requirement of a general power of appointment trust eligible for the marital deduction.

Answer 17

Solution: The correct answer is C. Of the options, only an outright bequest to a resident alien spouse who becomes a U.S. citizen before the estate return is filed qualifies for the unlimited marital deduction

Answer 18

Solution: The correct answer is A. Property that transfers to the second-to-die spouse is eligible for the marital deduction and, to the extent that it is not consumed, will be included in the second-to-die spouse’s gross estate at the fair market value at his date of death, including any appreciation that may have occurred since the first-to-die spouse’s estate. Therefore, future appreciation of an asset is not sheltered by using the unlimited marital deduction.

Answer 19

Solution: The correct answer is B. To qualify for the marital deduction, the asset must be included in the gross estate and transfer to the spouse. In this instance there are two assets that are transferred to the spouse, the annuity and the wrongful death award. The annuity is included in the gross estate but the wrongful death award is not because it is compensation for the spouse’s loss, not an asset attributable to the deceased.

Answer 20

Solution: The correct answer is B The surviving spouse must be entitled to all income from the trust annually. No one else should be able to appoint the surviving spouse's income. Choice A is a requirement. The power to appoint is sufficient, it is not necessary to extend the power to all of those listed. Choice C is a requirement, If the trust has non income producing assets the surviving spouse may request that they are sold to produce income. Choice D is a requirement. The power can be exercisable during life, at death, or both. But lifetime alone would be sufficient.

Answer 21

Solution: The correct answer is C. The spouse becoming a US citizen is not a requirement of a QDOT, if the spouse is a citizen, they no longer need a QDOT. Choice A is a requirement - the trust must allow the U.S. trustee to withhold tax on principal distributions. Choice B is a requirement - at least one trustee must be a U.S. citizen or domestic corporation. Choice D is a requirement - the trust must have assets or trustee net worth to pay impending estate taxes.