TOPIC 95: MARITAL DEDUCTION in Visual Studio .NET

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TOPIC 95: MARITAL DEDUCTION
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Note: The estate tax will probably be eliminated for estates of decedents who die after 2009 As such, most estate planning will focus on postponing taxes, with the hope that at least one spouse lives to 2010 or beyond 1 Characteristics A There is currently no limitation on the amount of property that may qualify for the marital deduction B The deduction does not apply to a terminable interest C Advantages of the 100 percent marital deduction (1) Simple and inexpensive (2) Surviving spouse gets complete control over the assets D Disadvantages of the 100 percent marital deduction (1) Decedent s uni ed credit is unused (2) The estate tax between the two spouses may be higher for the reason stated in the preceding item (1), assuming the second death occurs before 2010 Both estates are taxed as one estate at the death of the surviving spouse, so the larger the estate, the higher the rate of tax on the top dollar 2 Terminal interest rule and exceptions A A terminable interest is de ned as an interest that ends upon an event or contingency For example, a spouse initially gets an interest in the property, but this interest terminates upon some event (usually death) and the interest then passes to someone else B A terminal interest is de ned as a property interest with three characteristics: (1) It is subject to some future absolute or contingent termination of the surviving spouse s interest (2) The possibility of termination is created by the decedent, and there will be a shift in the interest (3) Some other person or entity (other than the surviving spouse and his or her estate) will possess or own the property C Exceptions to terminable interest
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322 - Estate Planning (1) Under Section 2056(b)(3), if the only condition whereby the surviving spouse s interest may terminate is death in a common disaster or within six months of the decedent s death and such death does not occur (2) Under Section 2056(b)(5), if the surviving spouse is entitled to all the income for life and the surviving spouse has a general power of appointment (3) Under Section 2056(b)(7), if the personal representative elects to deduct the value of quali ed terminable interest property (QTIP) (4) Under Section 2056(b)(8), if property is transferred to a quali ed charitable remainder trust, where the surviving spouse is the only noncharitable bene ciary 3 QTIP planning and the prior transfer credit A The rst spouse to die has power of the ultimate disposition of property B For a property transfer to receive QTIP treatment, the following two conditions apply: (1) An irrevocable election must be made by the donor spouse or by the executor for QTIP, and (2) The surviving spouse must receive a quali ed income interest for life Income from the trust must be paid at least annually to the surviving spouse C A quali ed income interest is de ned as follows: (1) The surviving spouse must be entitled to receive all income from the property; in other words: (a) Some form of distribution of income is mandatory (b) Accumulation is not permitted (c) Only a spouse can receive the income; no other bene ciaries are permitted (2) Income must be paid at least annually (3) No person may assign any part of the property to any person other than the surviving spouse (4) For federal estate tax purposes, the value of the property is taxable in the surviving spouse s gross estate D Property treated as QTIP and that quali es for the marital deduction in the owner s estate tax return must be included in the surviving spouse s gross estate When such QTIP property is later dispersed from the surviving spouse s estate, the executor of the estate is entitled to seek repayment from the recipients for estate taxes paid on the surviving spouse s estate If reimbursement is not sought, the bene ciaries of the estate may be deemed to have made a gift to the persons from whom reimbursement could have been obtained E Sometimes called a C trust or a Q trust 4 Special planning for noncitizen spouses A IRC Section 2056(d) disallows the marital deduction if the surviving spouse is not a US citizen B If the spouse becomes a citizen before the federal estate tax return is led (within nine months), IRC Section 2056(d) does not apply However, the spouse must have been a US resident at the time of the decedent s death C The marital deduction is allowed for property placed in a quali ed domestic trust (QDOT) that passes to a non-US surviving spouse (1) The executor makes an irrevocable election (2) Requires at least one trustee to be a US citizen or US corporation
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Topic 96: Deferral and Minimization of Estate Taxes - 323 (3) The trustee has the right to withhold estate tax on distribution (4) US laws preside over the quali ed domestic trust (QDOT), so whenever a trustee distributes any principal from the trust, estate taxes must be paid to the US Treasury (5) US Treasury is given the right to collect taxes at the second death, no matter where the spouse is domiciled This rule prevents a surviving spouse from taking a marital deduction in the United States and then exiting the country to avoid estate taxes (6) To qualify for the marital deduction, the property passing to the QDOT for the noncitizen spouse must also meet all rules pertaining to the marital deduction 5 Marital deduction and bypass planning A A bypass trust (also known as a nonmarital trust or a B trust) is generally used to take advantage of the uni ed credit Planners sometimes use a method in which a testator s assets are placed in A, B, and Q trusts B A bypass trust is funded with assets equal to the exemption equivalent, and the remaining property is divided in any desired proportion between an A and a QTIP trust C The assets transferred to the bypass trust are taxed at the rst spouse s death even though the use of the uni ed credit results in no tax being due It bypasses the surviving spouse s estate (or some other income bene ciary s estate) for tax purposes D The bypass trust gives the spouse a right to income, as well as access to principal for purposes of health, education, support, or maintenance, without the property being included in his or her estate at death E Highly appreciated assets are often placed in a bypass trust to freeze the value for estate tax purposes at the death of the rst spouse F Upon the death of the rst spouse, trusts B and C are funded and become irrevocable The surviving spouse can control the distribution of assets only according to the terms of those trusts (He or she may or may not be given a limited power to appoint corpus or to withdraw limited to an ascertainable standard health, education, maintenance, and support G Trust A can be amended or revoked by the surviving spouse
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