Chapter 47 - § 47.6 • MARITAL DEDUCTION PLANNING

• Jurisdiction: Colorado

§ 47.6 • MARITAL DEDUCTION PLANNING

§ 47.6.1—Outright Transfers

A transfer outright and free of trust from the deceased spouse to the surviving spouse will qualify for the marital deduction, provided that the interest transferred is not a non-qualified terminable interest. The wisdom of providing for an outright transfer must be considered carefully as it may be that the protective and management aspects of a marital trust will argue against an outright transfer.

§ 47.6.2—Marital Trusts in General

A marital trust may protect a surviving spouse from the undue influence or duress of others, whether family members, in-laws, or financial predators. The marital trust also provides a management vehicle for the assets, particularly in the event of the survivor's incapacity. Depending upon the surviving spouse's age, health, investment abilities, and business experience, a co-fiduciary such as a corporate trustee or an investment advisor under the Colorado Uniform Directed Trust Act (C.R.S. §§ 15-16-801, et seq.) may provide additional security for the surviving spouse.

Whatever remains in a marital trust as of the date of death of the surviving spouse, although it may avoid being included in his or her probate estate, will be included in his or her taxable estate. Depending on how the trust is structured, it may avoid being subject to the claims of the surviving spouse's creditors.

§ 47.6.3—Power of Appointment Trust

The so-called "power of appointment" trust requires that the surviving spouse be entitled to all income from the trust assets for his or her life and have a testamentary and/or inter vivos general power of appointment over the entire trust corpus. Only that property placed in the power of appointment marital trust that qualifies for the marital deduction will be deductible.

Right to Income

The surviving spouse's income interest must be payable at least annually. Treas. Reg. § 20.2056(b)-5(a)(2). Typically, the surviving spouse is entitled to the income from the assets funding the marital trust beginning with the decedent's death. Treas. Reg. § 20.2056(b)-5(f)(9). Income may be accumulated as long as the surviving spouse has the right to compel distribution of the income to himself or herself at least annually. Treas. Reg. § 20.2056(b)-5(f)(7) and (8).

Unproductive Property

The surviving spouse's right to income is central to I.R.C. § 2056(b)(5). Thus, the trustee may not hold unproductive property for an unreasonable period of time without the surviving spouse's consent. Treas. Reg. § 20.2056(b)-5(f)(4) and (5). Marital trusts routinely contain a provision that prohibits a trustee from holding unproductive property or that grants the surviving spouse the power to demand that the trustee convert the unproductive property to productive property.

Administrative Powers

Most marital deduction trusts contain language that forecloses the trustee from exercising any administrative power in a manner that would forfeit or lessen the available marital deduction. If specific administrative powers infringe upon the right of the surviving spouse to complete enjoyment of income, the general savings clause may be ineffective. See Comm'r v. Procter, 142 F.2d 824, 827-28 (4th Cir. 1944). The Internal Revenue Service (IRS) has ruled, however, that such a savings clause may preserve the marital deduction under certain circumstances. See Rev. Rul. 75-440, 1975-2 C.B. 372.

General Power of Appointment

The surviving spouse must have a general power of appointment, exercisable during life or at death or both, over the entire trust corpus. The general power must be exercisable by the surviving spouse alone. The power may not terminate during the surviving spouse's lifetime unless the surviving spouse releases or exercises the power. The power must not be limited in purpose and must not be subject to a condition. I.R.C. § 2056(b)(5); Treas. Reg. § 20.2056(b)-5(g)(3).

The power of appointment must be exercisable by the surviving spouse "in all events." A mere power to invade the trust corpus may be subject to interpretation as a limited power. Therefore, marital deduction trust language typically includes the surviving spouse's power to appoint to himself or herself, his or her estate, or the creditors of either. See I.R.C. § 2041(b).

§ 47.6.4—Estate Trust

An interesting, but infrequently utilized, type of marital trust is the estate trust. If, at the termination of a trust created for the sole benefit of a surviving spouse (either for the spouse's lifetime or for a term of years), the trust corpus and any accumulated income will pass to the surviving spouse or his or her estate, the property so passing will qualify for the marital deduction. Treas. Reg. § 20.2056(c)-2(b)(1)(i) through (iii); Rev. Rul. 72-333, 1972-2 C.B. 530. The estate trust has advantages. Its corpus will qualify for the marital deduction in the deceased spouse's estate. Its corpus will receive a further step-up in basis on the death of the surviving spouse. Trust income may be distributed to the surviving spouse on a...