 |
 |
 |
|
|
|
 |
|
|||||||||||||||||||||
A list of all trust officers and their bios Trust
Services Investment
Services Christopher
Stoneman's Investment
Services Socially Aware Investing Option |
INTERSPOUSAL TRANSFERS: In this article we will examine some of the estate and gift tax provisions applicable to transfers between spouses. The generation-skipping transfer tax does not concern itself with transfers from one spouse to the other. Stated in its simplest but - as we shall see - not completely accurate terms, transfers by a wife to a husband and vice versa are free from the imposition of the federal gift tax or the estate tax. This freedom is accomplished by means of a deduction which is taken in arriving at taxable gifts or at the taxable estate, as the case may be, rather than by an exclusion from gross gifts or the gross estate. This is largely a distinction without significance except, for example, when it comes to the question whether an estate is required to prepare and file an estate tax return. It is the size of the gross estate which determines whether a return is due ($625,000 or more in 1998) and not the size of the taxable estate. Thus if everything is left to the decedent's surviving spouse, there will almost certainly be no taxable estate and no estate tax, but a return may well have to be filed. The gift and estate tax deduction for gifts by a donor or his estate to his spouse are generally referred to as "marital" deductions. There are many forms of marital deduction gifts. OUTRIGHT GIFTS Starting with the simplest transfer of all, an outright gift of money or other property will generate a marital deduction. Examples -
A survivorship requirement will not disqualify a gift provided that it does not require survival for more than six months. But if the will or local law requires that any part of the decedent's taxes, expenses or debts be paid out of the marital gift, the amount of the marital deduction will have to be reduced by the amount by which the gift is reduced (which in turn will increase the amount of the estate-tax bill - a circular computation will ensue). It is well therefore to be sure if possible that whatever taxes may be imposed are charged against other property of the estate for which an estate tax marital deduction is not to be claimed. (The same would be true with gifts to charity which are also deductible). JOINT OWNERSHIP The next most frequently utilized marital deduction is probably for joint ownership by husband and wife with right of survivorship (see Article II), whether as joint tenants or as tenants by the entirety (but not, without more, as tenants in common). For purposes of the gift tax the creation of a joint tenancy or tenancy by the entirety by one spouse creates an interest in the other which qualifies for a gift tax deduction (for some reason the term "marital deduction" is not actually used in the gift tax law). For estate tax purposes, the gross estate normally includes one half of the value of any property which the decedent and his or her spouse owned as joint tenants or tenants by the entirety - regardless of how the joint ownership originated - and then a marital deduction is allowed for the passage of that one half to the survivor. This has an interesting result as far as the income tax basis of the property in the hands of the survivor is concerned, as the following example will show. Example Adam and Betty own their home as tenants by the entirety. When they acquired it in, say, 1990, Adam paid $150,000 for it. Placement of the house in joint names with right of survivorship constituted a gift by Adam of $75,000 to Betty which qualified for the gift tax marital deduction. When Adam dies, in 1998, the house has increased in value to $220,000 according to the appraisal made shortly after Adam's death. The house passes to Betty as survivor - i.e., she receives Adam's one-half interest and now owns the entire property. Adam's estate receives a marital deduction for the one half which was included in his gross estate. A year or two later Betty, now sole owner, decides to sell the place and move away. She receives $250,000 for the house. Her profit for income tax purposes will be $65,000, not $100,000 ($250,000 minus $150,000). This is because half of the original tax cost of $150,000 continues to apply for one half of the property (the one half already owned by Betty and therefore not included in Adam's gross estate); but for the other half (which was included in his estate) the tax cost is increased - or "stepped up" as the jargon has it - to one half of the date-of-death value, i.e., one half of $220,000. Betty's hybrid tax cost is therefore $75,000 plus $110,000, or $185,000, making for a tax profit of $65,000 (which may or may not generate any tax, depending upon whether or not some non-recognition of gain provision may be invoked). INTESTACY Now take another situation – intestacy. Suppose that one spouse, Eric, dies without a will, survived by his wife, Peggy, and by two children of the marriage. Eric has a probate estate of $600,000 (see Article V), a life insurance policy payable to Peggy for $500,000, and an IRA for $75,000. Eric and Peggy live in a $200,000 mortgage free home which they own jointly as tenants by the entirety. Because of Eric's (presumably unintentional) intestacy, only one third of his probate estate qualifies for the marital deduction; the other two thirds do not, since under local law they go to the two children. Eric's gross estate and marital deduction are as follows:
TRUSTS Turn now to the marital deduction trust, i.e., a living or testamentary trust for the benefit of a spouse. Living marital deduction trusts (trusts which are funded and fully effective during the spouses’ joint lifetime) are valid but relatively uncommon, so let us concentrate on those which start up at the death of the donor spouse. These may be contained in the donor spouse's will, in which event they are truly "testamentary"; or they may be embodied in a revocable trust which is executed during the donor's lifetime but which is not funded until the donor's death. Another possibility is a revocable trust which the donor funds while alive; it too, like the unfunded revocable trust, will only become effective for the other spouse upon the death of the first to die. And let us further focus our discussion of marital deduction trusts on the two most frequently encountered such arrangements: the "qualified terminable interest property", or "QTIP", trust; and the life-estate-plus-power-of-appointment trust. The QTIP trust must meet certain specific requirements:
Example Don's will leaves $500,000 to a trustee to hold in trust for the benefit of Don's wife, Penny, and pay her all of the trust income from his death until she dies. However, the trust also provides that if Penny remarries, the trust is to terminate and go to Don's and Penny's three children. This trust does not qualify for marital deduction, since it is manifestly possible that Penny may not receive all of the trust income for life. It would also be defective (without the remarriage provision) because it does not require specifically that the income be paid at least annually. Katherine leaves her residuary estate in trust for her husband, Peter, for life, giving him power to withdraw $5,000 from the trust principal each year. Upon his death the trust is to go to the couple's descendants or, if there are none, as Peter may appoint in his will among a limited class of individuals (for example, among his and Katherine's families). If he does not effectively exercise this limited or special "power of appointment"(see Article VI), the trust is to go one half to Katherine's sister's descendants and one half to Katherine's parents or the survivor of them. Katherine dies and her executor makes the necessary election on Katherine's estate's estate tax return. The trust is a valid QTIP trust and qualifies for an estate-tax marital deduction in Katherine's estate. As noted, there is a second trust format which will qualify for the marital deduction – the life-estate-plus-general-power-of-appointment arrangement. Here, the surviving spouse receives all of the trust income, at least annually, for life and has a “general” power of appointment over the principal exercisable by her alone, either by deed during her lifetime, by will at her death, or by both. A power of appointment is deemed a general power if it may be exercised in favor of its holder (the surviving spouse), her estate, her creditors or the creditors of her estate. The mere existence of such a power, whether or not it is exercised, is sufficient to require that the underlying property be included in the holder’s estate; and a release of the power during the holder’s lifetime will generally be ineffective to keep the value of the trust at the holder’s death from being included in her estate. In her will Geraldine creates a trust for the benefit of her husband, Manuel. The trustee is required to pay Manuel all of the trust income for life and may also distribute principal to him if it determines that it is needed. In addition Manuel himself has the power to appoint the trust property in his will to whomever he pleases. If Manuel fails to exercise the power, the trust property is distributed to Geraldine’s brothers and sisters. Geraldine’s estate will be entitled to a marital deduction for the value of the trust at her death, and the value of whatever remains at Manuel’s death will be included in his gross estate regardless of whether or not he exercises the power. One final comment – the marital deduction and “simultaneous” death. If a husband and wife die under circumstances which make it impracticable to determine which of them actually died first – an automobile or airplane accident, for instance – and each has a will making a marital deduction gift to the other, what are the tax and estate planning results? First, assume that the couple’s wills are silent on the topic and say merely that there is to be a gift to the spouse “if he/she survives me”. In Vermont, as in almost every jurisdiction, the answer is found in the statute, which provides that each will is construed as though its maker were the survivor. Consequently, there will be no marital deduction in either estate, which may (or may not) be an entirely satisfactory result. But suppose that the draftsman has specifically addressed the problem. Tony’s estate is worth $5 millions, whereas his wife Mary’s is only $500,000. Each will contains a “QTIP” trust for the other spouse’s benefit. Tony’s will should probably deal with the simultaneous death situation by stating that in that event Mary is to be conclusively presumed to have survived Tony; Mary’s will should either be silent (so that the statute applies) or, as is sometimes done, it may contain the statutory proposition – i.e., that for purposes of Mary’s will Tony is to be conclusively presumed to have died before her. Since the provision in Tony’s will is recognized for tax purposes, his QTIP trust will be effective and his executor will be able to elect a marital deduction for all or a part of its value and in so doing achieve a combined tax bill for the two estates which will be significantly less than the tax bill on Tony’s estate with no marital deduction. There would be no point in having a similar provision in Mary’s will. The same consideration may be equally applicable if the couple’s estates are dealt with by living trusts rather than by will. But it should be noted that a will provision such as Tony’s, making his wife the survivor, will not apply to other instruments, which will need to be separately dealt with with their own specific clauses. The same is true, for example, with life insurance and IRA beneficiary designations. The complete list of Christopher Stoneman articles is:
|
|||||||||||||||||||||
