Chapter 10 - The Unlimited Marital Deduction

Question 1

Define ABC Trust Arrangement

Answer 1

A common trust arrangement that utilizes a bypass trust (the B trust), a GPOA Trust (the A trust), and a QTIP Trust (the C trust) to provide the necessary support to a surviving spouse while maximizing the use of the decedent’s applicable estate tax credit and providing the decedent the ability to determine the ultimate beneficiary of most of his assets at the death of the surviving spouse.

Question 2

Define Ascertainable Standard

Answer 2

An objective standard for allowing distributions defined in the IRC as distributions for health, education, maintenance, or support (HEMS)

Question 3

Define Bypass Trust / Credit Shelter Trust / B Trust

Answer 3

A trust created to ensure that an individual makes use of his applicable estate tax credit.

Question 4

Define Estate Trust

Answer 4

A trust which grants the surviving spouse a testamentary general power of appointment over the trust assets. Because of the spouse’s general power of appointment over the trust’s assets, the fair market value of the trust will be eligible for the unlimited marital deduction at the death of the first-to-die spouse.

Question 5

Define General Power of Appointment Trust (GPOA) / A Trust

Answer 5

An irrevocable trust that can be created either during an individual’s lifetime or at an individual’s death that gives the agent the right to appoint the settlor’s assets.

Question 6

Define Overqualified

Answer 6

A decedent’s taxable base is less than the applicable estate tax credit equivalency because too many assets have passed to a surviving spouse.

Question 7

Define Portability

Answer 7

The ability of the executor of an estate to timely file Form 706 to transfer the decedent’s unused credit exclusion to the surviving spouse.

Question 8

Define Privity

Answer 8

The prohibition of a surviving spouse transferring his or her inherited or donated unused exemption amount to his or her next spouse at the surviving spouse’s death. The privity requirement prohibits the accumulation of the exemptions through remarriage.

Question 9

Define Qualified Domestic Trust (QDOT)

Answer 9

A trust created for the benefit of a noncitizen spouse which has enough transfer stipulations to allow the US government to subject the asset remaining at death of the noncitizen spouse, as well as the distributions of principal, to estate taxation. Assets transferred to a QDOT qualify for the unlimited marital deduction

Question 10

Define Qualified Terminable Interest Property Trust (QTIP) / C Trust

Answer 10

A trust which allows a decedent to qualify a transfer for the marital deduction at his death yet still control the ultimate disposition of the property.

Question 11

Define Survivorship Clause

Answer 11

A clause included in a will requiring that the legatee survive for a specific period in order to inherit under the will. The bequest will qualify for the marital deduction if the property transfers to the surviving spouse and the time period of the survivorship clause is six months of less.

Question 12

Define Terminable Interest

Answer 12

An interest that terminates at some point.

Question 13

Define Underqualified

Answer 13

When too much of a decedent’s property is subject to estate tax at the death of the first spouse due to improper use of the unlimited marital deduction.

Question 14

Define Unlimited Marital Deduction

Answer 14

Because a married couple is viewed as one single economic unit for estate and gift tax purposes, an individual receives a deduction from his gross gifts or from the adjusted gross estate for transfers to spouse. Hence, transfers to a spouse are not subject to estate or gift tax.

Question 15

What are the benefits of the unlimited marital deduction? 3

Answer 15

• Defers estate taxes until the death of the surviving spouse.
• May fund the applicable estate tax credit of the surviving spouse.
• Ensures the surviving spouse has sufficient assets to support his lifestyle.

Question 16

What are the two requirements to use the UMD?

Answer 16

• The decedent must have been married as of the date of his death, and
• The property must be included in the gross estate of the first spouse to qualify for the UMD. The property must be included in the gross estate of the second spouse, unless consumed or otherwise dissipated.
• The property is transferred to the spouse, generally, without a terminable interest

Question 17

What are the two ways the UMD is limited?

Answer 17

• The property passing to the spouse must qualify for the marital deductions, and
• Only the net value (gross value less taxes, debts, or estate expenses) of the qualifying property that is left to a surviving spouse can be included as the marital deduction

Question 18

What are the four exceptions to the UMD not being permitted if the transfer is a terminal interest.

Answer 18

• QTIP
• Charitable Remainder Trust where the spouse is the only noncharitable beneficiary
• A terminable interest, either outright or in trust, over which the surviving spouse has a general power of appointment.
• A survival contingency of no more than six months.

Question 19

What can qualify for the UMD?

Answer 19

1. Outright transfers to spouse
2. GPOA Trusts
   a. Lifetime GPOA Trusts where the spouse is only income beneficiary.
   b. Estate Trusts where trust assets pass to spouse’s estate.
3. QTIP Trusts where the spouse is only income beneficiary

Question 20

What is the what is the most a surviving spouse can receive from a trust without its assets qualifying for the UMD?

Answer 20

If the decedent leaves property in trust for a benefit of the surviving spouse, and the trust gives the spouse the right to receive all income, the right to receive distributions for HEMS and the right to demand the greater of $5,000 or 5% of the trust corpus each year, the spouse will not have a sufficient ownership in the property to require an inclusion in her estate.

Question 21

Based off the terminable interest rule, when twill the UMD not be available?

Answer 21

If the following three criteria are met:

1. a terminable interest is transferred to a surviving spouse, and
2. another interest in the same property passes from the decedent to someone other than the surviving spouse for less than full and adequate consideration in money or money’s worth, and
3. the third party may possess or use any part of the property after the interest of the surviving spouse terminates.

Question 22

What two types of trusts can be created to protect property for a decedent’s heirs and still qualify for the unlimited marital deduction?

Answer 22

• General Power of Appointment Trusts

- Qualified Terminable Interest Property Trusts

Question 23

What are the the requirements to qualify for the UMD using a GPOA? 4

Answer 23

1. The trust must grant to the surviving spouse a power to appoint the trust property to:
   -themselves,
   -their estate,
   -their creditors, or
   -the creditors of their estate
   and
2. The surviving spouse, and only the spouse, must be entitled to receive all of the income from the trust at least annually,
3. The general power of appointment granted to the surviving spouse must be exercisable by the surviving spouse alone, and
4. No other person that the surviving spouse may appoint any part of the property to anyone other than surviving spouse during the life of the surviving spouse

Question 24

In order to qualify as a QTIP, what requirements must be met?

Answer 24

1. The property transferred to the trust must qualify for the UMD. Consequently, it must be included in the gross estate of the first-to-die spouse and must be transferred to the surviving spouse (in this case, in trust)
2. The surviving spouse is entitled to all of the trust income for their life, and that income must be paid at least annually. If the trust earns income during the surviving spouse’s lifetime that is note distributed as of the date of the surviving spouse’s death, the trust must distribute this income to the surviving spouse’s estate (stub income)
3. The surviving spouse must have the authority to compel the trustee to sell non-income producing investments and reinvest those proceeds in income-producing investments.
4. During the surviving spouse’s lifetime, no one can have the right to appoint the property to anyone other than the surviving spouse.
5. The transferor or his executor must file an election to treat the trust as a QTIP Trust on the transferor’s gift return or the decedent’s federal estate tax return.

Question 25

When would a lifetime transfer to a QTIP be appropriate?

Answer 25

When a wealthy spouse wished to ensure that the less wealthy spouse has sufficient funds to make full use of their estate tax exemptions equivalent if the less wealth spouse dies first.

Question 26

What is annual exclusion for gifts to noncitizen limit?

Answer 26

2013 - $143,000

2014 - $145,000

Question 27

What requirements must be met to qualify a QDOT for the UMD?

Answer 27

1. At least one of the QDOT trustees must be a US citizen or a US domestic corporation;
2. The trust must prohibit a distribution of principal unless the US 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 US to ensure the payment of federal estate taxes, or the trustee must have a minimum net worth sufficient to assure the payment of the estate taxes upon the death of the noncitizen surviving spouse; and
4. The executor of the citizen-spouse’s estate must elect to have the marital deduction apply to the trust.

Question 28

The grantor of the ILIT can then name his spouse as the primary beneficiary of the trust, granting the surviving spouse what?

Answer 28

1. The right to income;
2. The right to receive distributions for HEMS, and
3. The right to demand up to $5,000 or 5% of the trust corpus each year without subjecting the principal of the ILIT to estate taxation in the surviving spouse’s gross estate.