Formula marital deduction clause not a guaranteed estate tax shelter.

• Author: Abbott, Melissa A.

Estate plans often include a formula clause for calculating the amount of the bequest ultimately passing to the surviving spouse. The taxpayer desires to provide for the surviving spouse while minimizing, or even eliminating, estate taxes.

A pecuniary formula calculates an amount that is equal to:

* The optimal marital deduction, less

* The value of all other items includible in the gross estate that qualify for the marital deduction.

Alternatively, a fractional-share-of-residue formula calculates a fractional portion of the residual estate. The denominator of that fraction is the value of the entire residuary estate. The numerator is the same formula used in the pecuniary calculation:

* The optimal marital deduction, less

* The value of all other items includible in the gross estate that qualify for the marital deduction.

Both of these formulas should create a taxable estate equal to zero. The maximum tax-free amount goes to individuals other than the spouse and/or trusts, while any excess goes to the surviving spouse, either outright or in a marital trust.

FLP Inclusion

In Estate of Turner, T.C. Memo. 2011-209 (Turner I), the Tax Court originally held that the decedent's inter vivos transfers of property to a family limited partnership (FLP) had to be included in his gross estate under Sec. 2036. The Tax Court found that the decedent's lifetime FLP transaction did not meet the exception for a bona fide sale for adequate and full consideration in money or money's worth under Sec. 2036 (a). The court held that the assets the decedent had previously transferred to the FLP were includible in his gross estate under Secs. 2036 (a) (1) and (2). According to the court, the decedent retained "the possession or enjoyment of, or the right to the income from, the property, and retained the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income there from."

In the decedent's case, he had retained a general partner interest in the RP. The court did not agree with the estate's assertions that the decedent had any nontax motives for forming the FLP. In particular, the decedent transferred mainly securities and cash to the FLP and his investment strategies remained consistent with those before the transfers. The court found that there was no purposeful or active management of the assets once they were transferred to the FLP. The decedent also commingled personal assets with the...