Chapter 47 - § 47.7 • DESCRIBING THE MARITAL DEDUCTION GIFT

• Jurisdiction: Colorado

§ 47.7 • DESCRIBING THE MARITAL DEDUCTION GIFT

§ 47.7.1—In General

Where marital deduction planning is being done by a will or trust, the draftsperson must describe the portion of the probate or trust estate to be transferred to the surviving spouse. Whether one elects to describe a specific dollar amount or to provide a percentage or fraction of the estate, maximization of the marital deduction is best accomplished by using a formula keyed to the language and limitations of I.R.C. § 2056.

§ 47.7.2—Formula Gifts

In General

Usually, the optimum tax savings plan is to pass to the surviving spouse exactly the amount of property necessary to obtain a marital deduction sufficient to reduce the decedent's federal estate tax to zero or the lowest possible amount.

A proper formula in a will or trust takes into account those assets that pass to the surviving spouse apart from the controlling provision and that qualify for the marital deduction, thus reducing the amount distributable from the decedent's probate or trust estate. Also, the formula must consider the fact that the estate tax may be completely eliminated by the applicable exclusion amount (I.R.C. § 2010), or the credit for tax on prior transfers (I.R.C. § 2013), without claiming a marital deduction. Thus, under a proper formula, no estate tax is payable at the decedent's death, and the estate of the surviving spouse is not increased any more than necessary.

One arguable disadvantage of a formula marital deduction gift is that it involves relatively complicated phraseology and may be somewhat difficult to explain to clients. Potential tax savings, however, tend to make rather complex arrangements more palatable.

An additional difficulty is that a formula clause potentially can raise conflicts between the surviving spouse and other beneficiaries. For example, the election to take estate expenses as estate income tax deductions (I.R.C. § 642) or as estate tax deductions (I.R.C. § 2053) can increase or decrease the amount of the marital deduction by changing the amount necessary to reduce the estate tax to zero.

Each of the funding methods described below has administrative advantages and disadvantages. No one type of formula will be the best under all circumstances. Moreover, the picture is complicated by the fact that, within each formula option, the mechanics of funding will depend on the manner in which subject assets are to be valued (1) at date of death values, (2) at date of distribution values, or...