Chapter 47 - § 47.4 • DEDUCTIBLE TERMINABLE INTERESTS

• Jurisdiction: Colorado

§ 47.4 • DEDUCTIBLE TERMINABLE INTERESTS

§ 47.4.1—Deductible Terminable Interests

Any terminable interest not declared by I.R.C. § 2056(b)(1) to be nondeductible is a deductible interest and qualifies for the marital deduction. I.R.C. § 2056(b); Treas. Reg. § 20.2056(b)-1(a), (c), and (d).

§ 47.4.2—Life Estate with General Power of Appointment

An important exception to the nondeductible terminable interest rules is the testamentary gift to the surviving spouse of a life estate in property together with a general power of appointment over the property. While the transfer may be outright or in trust, it is commonly embodied in a marital trust under a will or a trust agreement. I.R.C. § 2056(b)(5); Treas. Reg. § 20.2056(b)-5(a). In order to qualify for this exception, certain requirements must be met.

Right to Income

The surviving spouse must be entitled to all income from all property comprising the life estate, payable to the surviving spouse at least annually for the spouse's life. I.R.C. § 2056(b)(5). No person other than the surviving spouse may receive income from the property during the surviving spouse's life. The non-payment of income from the property does not violate the income requirement unless the fiduciary is authorized by the dispositive instrument to delay distribution of the income beyond a reasonable period of administration. Treas. Reg. § 20.2056(b)-5(f)(9). Any income from the property that is undistributed at the death of the surviving spouse must be distributed either under the general power of appointment held by the surviving spouse or to the surviving spouse's estate.

General Power of Appointment

The surviving spouse must have a testamentary and/or inter vivos general power of appointment over the interest. The general power of appointment, exercisable in favor of the holder, the holder's estate, or the creditors of either, causes the property subject to the power to be taxed in the holder's estate for federal estate tax purposes. The general power must be exercisable by the surviving spouse alone and in all events. Further, during the surviving spouse's lifetime, there must be no power in any other person to appoint any part of the property to any person other than to the surviving spouse. I.R.C. § 2056(b)(5).

The value of a specific portion of a property interest may qualify under the general power of appointment provision, but the marital deduction will be available only to the extent that the right to income from such property...