MARITAL EXEMPTION IN ESTATE TAXATION.   Term Paper ID:23255 Click to get this paper

Essay Subject: Legality, methods of implementation, benefits, terminal interest, court decisions, testamentary division, IRAs, life insurance.... More...

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Paper Abstract: Legality, methods of implementation, benefits, terminal interest, court decisions, testamentary division, IRAs, life insurance. Paper Introduction: ESTATE TAXATION: MARITAL DEDUCTION Introduction “When the typical wealthy business owner dies, it’s a big payday for the IRS.” The estimate is that in such cases estate and other taxes usually “rob the family of over 50 percent (sometimes over 75 percent for certain types of assets) of the family wealth.” Such outcomes occur because the federal estate tax is a progressive tax beginning at 18 percent and eventually reaching 55 percent on the part of each taxable estate in excess of $3,000,000. This research examines the marital exemption, the effective application of which, can help to avoid such situations. The marital deduction is designed to permit a surviving spouse to avoid all or some of the federal estate tax until her or his own death. Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. The IRS, however,has interpreted the rules in a way that has reduced the actual amount ofdiscretion a decedent can provide. [14]Ibid., 811-812. Themarital deduction is designed to permit a surviving spouse to avoid all orsome of the federal estate tax until her or his own death.[4] The Marital Deduction Since the allowance of the unlimited marital deduction was establishedby the Economic Recovery Tax Act of 1981, a married person normally is ableto postpone the imposition of estate tax until the death of the survivingspouse, by transferring all of his or her gross estate to or for thebenefit of the survivor under the protection of the estate tax maritaldeduction.[5] Additionally, the allowance of a marital deduction, byelection, for qualified terminable interest property ("QTIP") has increasedthe likelihood that a married person will decide to leave her or his entireestate in a form that qualifies for the marital deduction, because thespouse dying first can control the ultimate disposition of her or hisproperty by the use of a QTIP. W. The propertytransferred is termed qualifying terminable interest property, or QTIP, andmust meet four requirements to qualify for the marital deduction. A lump sum distribution will result in immediate incometaxation on the taxable portion of the IRA proceeds which are taxable whenreceived by the beneficiary. O. 2. [18]H. "Getting QTIP Treatment for IRAs and QualifiedRetirement Plans," Trusts & Estates 131 (February 1992): 26. Kurtz, "Trap For the Unwary: Funding QTIP With Closely HeldStock," The Tax Adviser 23 (December 1992): 811. M. The Fifth Circuit, in astrong opinion, rejected this argument as violating the clear purpose ofCongress in enacting the QTIP provisions, and allowed the deduction for theamount elected by the executor."[21] The Eighth Circuit Court and theSixth Circuit Court reached similar conclusions. "Significant Recent Developments in Estate Planning: Part 2." The Tax Adviser 25 (November 1994): 698-7 9.Parker, J. Ross, P. C. The IRSruled that a QTIP election could be made.[24] In the letter ruling, themade clear that an essential qualification element was the complete pass-through to the surviving spouse of the trust's annual lottery installment.Section 2 56(b)(7)(c) of the Internal Revenue Code provides an automaticmarital deduction only if annuity payments are receivable directly by thesurvivor. "Reflections on Survivorship Life Insurance." Trusts & Estates 133 (April 1994): 28-35.Teitell, C. The Marital Deduction and A Foreign Spouse No marital deduction exists when non-United States citizens inheritassets for fear that they would leave the country to avoid the estate taxat the time of their own death.[12] A United States citizen can inheritany amount free of estate taxes from her or his spouse regardless ofwhether or not the spouse is a citizen. In subsequent private rulings, particularly TAM922 7, however, the IRS has revealed its ruling and audit position thatcomplying with the principles of Revenue Ruling 89-89 is the only way toqualify IRA benefits distributable in installments to a QTIP trust for themarital deduction."[29] Life Insurance and the Marital Deduction Because of the popularity of using the unlimited marital deduction,the insurance industry has developed survivorship (or second-to-die) lifeinsurance policies that provide for the payment of proceeds only upon thedeath of the surviving spouse where the proceeds can be used to pay theestate taxes arising at that time.[3 ] Although single life insurance isoften used to insure the life of the working spouse to provide financialsecurity for the surviving spouse, survivorship life insurance typically isused to provide the liquidity to pay estate tax upon the death of thesurviving spouse. M. "The IRS's General Aversion to Loan Guarantees on QTIP Trust Planning." The Tax Adviser 24 (July 1993), 447-452.Est. M. Nager, B. Any estate tax that would otherwise be imposed upon thedeath of one spouse is deferred until the death of the surviving spouse.The longer the surviving spouse lives, the greater the benefit of thedeferral of the tax. Hochberg, "Taxation Without Representation," Financial World164 (24 October 1994): 76. C. The trust was required to pay to the survivor for lifeeach lottery installment received after the other spouse's death. Such an outcome may be particularly important where thesurviving spouse is not the first spouse and the testator has children of aprior marriage. Testamentary Division and Marital Deduction In a situation where the decedent owned a controlling block of stock,the will divided the stock into two interests-one eligible for the maritaldeduction and one to use the unified credit. [25]IRS Letter Ruling (TAM) 94 3 5 (1 /14/93). J. "Taxation Without Representation." Financial World 164 (24 October 1994): 76.Hochberg, R. This analysis may be refined by applying it separately to eachasset class of the estate. Krause, and R. Allowing theexecutor to pay some tax on the first estate to reduce taxes on the secondcan be a valuable planning tool."[19] The Internal Revenue Service Regulations state that no part of abequest in trust will qualify for the marital deduction if the executor hasdiscretion to elect any amount to qualify for QTIP treatment, with thebalance going to a non-QTIP trust.[2 ] The executor's discretion resultsin no amount of property guaranteed to pass to the spouse. [21]Berger, 71. To the extent that the surviving spouse and all of theother heirs of the estate inherit more than $6 , of assets, a federalestate tax will be imposed. J. Easton, "The IRS's General Aversion to Loan Guarantees onQTIP Trust Planning," The Tax Adviser 24 (July 1993), 447. S. The maritaldeduction is designed to permit a surviving spouse to avoid all or some ofthe federal estate tax until her or his own death. "Such a provision isimportant when the minimum combined estate taxes result if the estates ofthe spouses are equalized, but property is not owned equally. D., Jr. Qualified Terminable Interest Property Prior to 1982, the transfer of a terminable interest to a survivingspouse did not qualify for the estate tax marital deduction.[13] Fortransfers of decedents dying after 1981, Section 2 56(b)(7) of the InternalRevenue Code provides a marital deduction for a transfer to a survivingspouse of a terminable interest in property that does not give thesurviving spouse testamentary control over the property. "3Ms ... In banking terms, an individualwho avails himself of the marital deduction is borrowing money from thegovernment. 1992), rev'g 97 TC 327 (1991), the surviving spouse was theexecutor charged with making the QTIP election. M., & Carlson, D. For example, a securities portfolio will likelygrow at a general capital market rate whereas real estate may grow at adifferent rate and a closely-held business at yet another rate.Accordingly, it may be determined that use of the marital deduction iseconomical for some assets, such as those with lower projected growthrates, but costly for other assets. 1981)(48 AFTR2d 81-6317, 81-2 USTC[paragraph]13,438). If, givenprojected estate growth, the 'interest' cost of this government loanexceeds the cost of commercially available credit, the marital deductionmay represent an unattractive loan compared to borrowing from a bank orpurchasing life insurance to pay the estate tax at the first spouse'sdeath. W. K. J., and Franklin, R. Berger, "IRS Loses Estate Tax Marital Deduction Case," TheTax Adviser 27 (February 1996): 7 . [3 ]Ross, Hill, and Baker, 28. [2 ]Internal Revenue Service Regulations, Section 2 .2 56(b)-7(h). The taxpayer and spousetransferred their rights to a revocable trust (the "lottery trust") thatwould collect the annual payments and immediately convey one-half to thetaxpayer's and his spouse's individual revocable trusts.[23] During thetheir lifetimes, the individual trusts would distribute net income at leastquarterly. 3. Blackman, "3Ms ... E. "The IRS Issues Final Regulations on QTIP Trusts." Trusts & Estates 134 (February 1995): 55-59.United States Internal Revenue Code, Title 26, United States Code (26 USC), 1994.United States Internal Revenue Service Regulations. [22]Ibid., 72. [26]Est. [1 ]R. [6]C. Sure Ways to Enrich the IRS." Modern Machine Shop 67 (October 1994): 34-35.Easton, R. Survivorship life insurance is not always the most cost effective wayof using insurance proceeds to fund the transfer of property, assignificant estate tax savings can be achieved in some cases by acquiring asingle life policy on the life of the spouse with the shorter lifeexpectancy.[31] Such an estate plan would use the insurance proceeds paidupon the death of the insured spouse to facilitate the transfer of propertyto the next generation at the insured's spouse death rather than defer theinter-generational transfer of property and associated estate tax by usingthe marital destination. [29]A. "What Should I Leave My Spouse?" Financial World 163 (13 September 1994): 68-69.Holding, G. W., Abbin, B. "The IRS hasdefended its interpretation of Sec. of Clayton, 976 F2d1486 (5th Cir. D. Abbin, and D. Chenoweth, 88 TC 1577 (1987).Hochberg, R. "Trap For the Unwary: Funding QTIP With Closely Held Stock." The Tax Adviser 23 (December 1992): 811-813.Nager, R. Substantial cost savings can beachieved by transferring 'fast growth' assets to the next generation eitherthrough lifetime gifts with borrowing (or liquidation of 'slow growth'assets) to pay the gift tax, or through testamentary disposition at thefirst spouse's death with insurance proceeds to pay the estate tax."[32] Summary This research examined the marital exemption, the effectiveapplication of which, can help to avoid such situations. [2]Ibid. [27]R. [12]Hochberg, "Taxation," 76. S. J. [23]Nager, Abbin, and Carlson, 7 6. O. Unlimited gift and estate tax marital deductions are allowable-whenstrict requirements are met-for transfers to spouses who are citizens ofthe United States.[6] Special rules apply for transfers to alienspouses.[7] Typical methods to attain estate tax marital deductions fortransfers to citizen spouses include (1) making an outright gift orbequest, (2) creating a trust that pays the spouse all the income for lifeand give her or him a general power of appointment over the entire trustprincipal, and (3) creating a QTIP trust.[8] A basic technique in marital deduction planning is to claim themaximum available marital deduction limited only by the amount sheltered bythe unified credit.[9] A credit shelter trust frequently is provided touse up the available unified credit. [15]Internal Revenue Code, Section 2 56(b)(7)(B)(ii). The two bequests divided theblock such that each bequest constituted a non-controlling interest. Whatever the surviving spouse spends or consumes during heror his lifetime will never be subjected to the estate tax. Hochberg, "What Should I Leave My Spouse?" Financial World163 (13 September 1994): 68. The issue in question involves a willthat allows the executor to elect any amount as QTIP. S. The QTIP provision, as written, appears to allows a decedent to givean executor discretion as to the amount to claim as a marital deduction,thereby reducing taxes at the death of the first spouse.[18] Thisinterpretation allows an executor to attempt to minimize the combinedestate tax burdens on both the decedent and the spouse. A testator can limit the a spouse's access to theprincipal of the IRA and have these proceeds qualify for the maritaldeduction by naming a QTIP trust as beneficiary of the proceeds andelecting that the proceeds be payable in a lump sum to the QTIP trust ather or his death. [5]M. P. In Est. Parker, "Fine-Tuning the Use of the Bracket Run," Trusts &Estates 13 (November 1991): 11. of Dean A. [7]R. [4]J. Thesequalifying requirements are as follows: (1) the property must pass from thedecedent to the surviving spouse; (2) the surviving spouse must be entitledto a qualifying income interest for life; (3) no other beneficiary can haveany rights in the property during the remainder of the life of thesurviving spouse; and (4) an irrevocable election must be made on thedecedent's tax return to treat the interest as QTIP property.[14] Section 2 56(b)(7)(B)(ii) of the Internal Revenue Code defines aqualifying income interest for life as one in which the surviving spouse isentitled to the income from all of the property, "payable annually or morefrequently, and no person, including the spouse, has any power to appointany part of the property to anyone other than to the surviving spouse."[15] Additionally, if the property is becomes unproductive, the survivingspouse must be given the power to require the property to be sold orconverted into productive property within a reasonable period of time.[16]If these provisions are complied with, the property will be treated aspassing to the surviving spouse and its full value will be deductible fromthe decedent's gross estate.[17] The value of the property upon thesurviving spouse's death will be subject to tax as a part of the survivingspouse's estate. 1981)(48 AFTR2d 81-6317, 81- 2 USTC [paragraph]13,438).Berger, H. The loan amount is equal to the estate tax deferred at hisdeath and the interest rate is pegged at the annual growth rate of theestate during the survivorship period. Washington: United States Government Printing Office, 1994.----------------------- [1]I. The exemption equivalent is payableto the credit shelter trust for the benefit of the surviving spouse forlife with the remainder over to the children. L. Franklin, "QTIP Trusts As IRA Beneficiary:Is There An Alternative to 89-89?" Trusts & Estates 131 (November 1992):16. Teitell, "The IRS Issues Final Regulations on QTIP Trusts,"Trusts & Estates 134 (February 1995): 55. Post-death income was payable monthly to thesurviving spouse. This unlimited marital deduction applies regardless of the size of theestate and the nature of the assets being left to the surviving spouse.[1 ] Assets that are held jointly between husband and wife, retirement andinsurance benefits that name the surviving spouse as beneficiary, andbequests from one spouse to the other by will are all typical approaches tousing the unlimited marital deduction. [8]Internal Revenue Code, Section 2 56(b). [9]R. W. Viewed in this fashion,use of the marital deduction can be evaluated as a cost. Carlson, "Significant RecentDevelopments in Estate Planning: Part 2," The Tax Adviser 25 (November1994): 7 1. Baker, "Reflections onSurvivorship Life Insurance," Trusts & Estates 133 (April 1994): 28. [31]Ibid. The appellate courtshave not seen the issue in the same light. K. Each spouse could withdraw all principal from her or hisrespective trust at any time. Sure Ways to Enrich the IRS," ModernMachine Shop 67 (October 1994): 34. [16]United States Internal Revenue Service Regulations (Washington:United States Government Printing office, 1994), Section 2 .2 56(b)-5(f)(4). A decision to acquire a survivorship policy to fund estate taxes"presupposes use of the marital deduction. [17]Kurtz, 812. The loan with accrued 'interest' iscalled by the government at the survivor's death. 2 56(b)(7) often, and the Tax Court hasconsistently sided with the Service in not allowing QTIP treatment for anamount limited only by the executor's discretion. Any amount not elected asQTIP would pass to another trust that did not qualify. E., Hill, P. BibliographyThe Ahmanson Foundation, 764 F2d 761 (9th Cir. "IRS Loses Estate Tax Marital Deduction Case." The Tax Adviser 27 (February 1996): 7 -72.Blackman, I. L. TheIRS ruled that a control block of corporate shares must be valued as asingle controlling interest for estate tax purposes, even though the willdivided the stock into two non-controlling blocks.[25] The IRS also ruledthat a minority discount had to be applied to the shares passing to themarital trust in computing the marital deduction.[26] "Taking Letter Ruling 94 3 5 to the extreme, estate tax could resultif only charities and the surviving spouse were estate beneficiaries andthe bequest funding divided controlling into non-controlling interests.Conversely, if the estate includes a control block, the ruling's rationalemight permit a greater-than-proportionate number of non-controlling sharesto fund a credit shelter bequest, assuming a control block funds themarital share."[27] The Marital Deduction and IRAs Designating the surviving spouse as beneficiary to receive theproceeds of an IRA or qualified retirement plan outright is the mostadvantageous estate planning option from a tax viewpoint.[28] Thisprocedure insures qualification of such proceeds for the estate tax maritaldeduction and preserves all income tax options, including a rollover of theproceeds by the surviving spouse to an IRA to defer income tax on the fundsuntil the spouse reaches age 7 years, six months. M. "Fine-Tuning the Use of the Bracket Run." Trusts & Estates 13 (November 1991): 8-15.Ross, M. [13]N. The surviving spouse will have the use and enjoyment of theassets that are left to her or him undiminished by the estate taxes thatanyone else who inherits property might be required to pay at a later date. "Getting QTIP Treatment for IRAs and Qualified Retirement Plans." Trusts & Estates 131 (February 1992): 26-3 .IRS Letter Ruling 9352 15 (9/3 /93).IRS Letter Ruling (TAM) 94 3 5 (1 /14/93).Krause, A. [19]Ibid. Chenoweth, 88 TC 1577 (1987); The AhmansonFoundation, 764 F2d 761 (9th Cir. "When the IRS issued Revenue Ruling 89-89, many practitioners thoughtthat it represented one approach but clearly not the exclusive method forqualifying IRA balances payable in installments to a QTIP trust for themarital deduction. Three significant benefits are available through the use of theunlimited estate tax marital deduction.[11] These benefits are as follows: 1. [28]G. Hill, and B. As noted above, however, nomarital deduction exists when a non-United States citizen inherits assetsin this manner. [3]United States Internal Revenue Code, Title 26, United States Code(26 USC), 1994, Section 2 1(c)(3). Thus, there is no need to liquidate assets to pay theestate taxes that would ordinarily be due within nine months after thefirst death. Individuals whose willscontain discretionary QTIP clauses need to review their estates todetermine whether any problems exist, as the IRS will "presumably continueto challenge QTIP elections in situations similar to these three cases"unless one resides in the jurisdictions of either the Fifth, Sixth, orEighth Circuit courts.[22] Funding A QTIP With Lottery Winnings Under the lottery rules prevailing in an actual case, gross winningswere payable in 2 equal annual installments. "QTIP Trusts As IRA Beneficiary: Is There An Alternative to 89-89?" Trusts & Estates 131 (November 1992): 16-23.Kurtz, N. of Dean A. In some cases, however,a testator may wants her or his surviving spouse to receive only the incomefrom the IRA or plan and as much principal as needed for her or his supportwith any remaining principal to be paid to others upon the death of thesurviving spouse. [24]IRS Letter Ruling 9352 15 (9/3 /93). S., and Baker, B. ESTATE TAXATION: MARITAL DEDUCTION Introduction "When the typical wealthy business owner dies, it's a big payday forthe IRS."[1] The estimate is that in such cases estate and other taxesusually "rob the family of over 5 percent (sometimes over 75 percent forcertain types of assets) of the family wealth."[2] Such outcomes occurbecause the federal estate tax is a progressive tax beginning at 18 percentand eventually reaching 55 percent on the part of each taxable estate inexcess of $3, , .[3] This research examines the marital exemption,the effective application of which, can help to avoid such situations. [32]Ibid., 29. Holding, Jr. M. [11]Ibid. P. The IRS and TaxCourt held that the discretionary election was tantamount to giving theexecutor a power to appoint property to someone other than the spouse.Thus, there was no qualifying income interest. If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.