1976, May, Pg. 626. Tax Tips.

5 Colo.Law. 626

Colorado Lawyer

1976.

1976, May, Pg. 626.

Tax Tips

626Vol. 5, No. 4, Pg. 626Tax TipsMarital Deduction Formula Provisions

Since the marital deduction for federal estate tax purposes may not exceed one-half of the decedent's adjusted gross estate (gross estate less deductions attributable to expenses, debts of the decedent and casualty or theft losses during administration),(fn1) it is often thought desirable to limit the property passing to a surviving spouse under the will of a predeceasing spouse (hereinafter referred to for brevity as the "wife" and "husband," respectively) to substantially that amount. Assuming the husband is the owner of the bulk of the property of the two spouses, and assuming that the husband predeceases the wife, this arrangement may serve to equalize the taxable estates of the two spouses, resulting in a lower total federal estate tax from both estates under our progressive system of federal estate taxation. Further, the limitation on the property passing to the wife upon the death of the husband need not necessarily reduce the amount of the estate available for her maintenance following the death of the husband since mandatory or discretionary distributions of income or principal may be made available to her from both the marital and nonmarital funds through the careful use of their respective testamentary trusts. Accordingly, the use of spousal bequests measured by reference to the federal estate tax marital deduction has come to be a widely used death planning technique.

This technique generally involves the use in the husband's will of a provision allowing the wife a residuary or preresiduary gift of an amount measured by reference to the maximum marital deduction as finally determined for purposes of the federal estate tax, or by reference to one-half of the adjusted gross estate for purposes of the federal estate tax, less other interests passing to the wife under other provisions of the will or through extra-probate means such as her survivorship right to joint tenancy property or her designation as beneficiary of proceeds of life insurance on the husband's life. Such provisions, commonly referred to as formula provisions, all have as their objective the limiting of the amount of property passing to the estate of the wife from that of the husband which will be subject to death tax upon her subsequent death, while allowing the husband's estate a full marital deduction.

Within the broad classification of formula provisions, however, two principal types, and several variations on each principal type, have been developed and may be selected depending upon the size and nature of the assets of the husband's and wife's respective estates, personal objectives, tax considerations and other factors. This article comments on selected features of some of the several types of formula provisions. It is to be emphasized that this treatment of formula provisions is intended merely to whet the appetite of those lawyers who have come to use one of the various types of formula provisions to the exclusion of others for more investigation into the flexibility that may be added to the estate plan by proper selection of formula provisions. Reference should be made to other materials(fn2) for an exhaustive treatment of this topic which, as is all too typical of matters having to do with federal taxation, is much too complex for the short treatment given here.

Formula ProvisionsExamples of the two principal types of formula provisions will be found in the looseleaf book entitled Colorado Estate Planning Forms, published jointly by Continuing Legal Education in Colorado, Inc. and the Probate and Trust Law Section of the Colorado Bar Association. Reference is made herein to these forms, although other examples are available from other sources.

The provision found at page 1-3 of the book would typically be referred to as a fractional share provision, since it leaves to the wife a fractional share of the residuary estate the numerator of which is equal in amount to the maximum marital deduction less other interests passing to the wife outside the formula provision, and the denominator of which is the value of the residuary estate as finally determined for federal estate tax purposes. In contrast to this provision is that found at pages 7-4 and 7-5 of the book. Here a pecuniary amount is left to the wife equal to one-half the value of the adjusted gross estate minus all extra-probate items passing to the wife, and thus this provision is usually referred to as a pecuniary formula provision. Although the use of either a fractional or pecuniary provision will make available to the husband's estate precisely the same amount of marital deduction to be claimed on the federal estate tax return, it is probable that the value of the wife's estate, following settlement of that...