Inter Vivos Marital Dispositions

• Author: Jerold I. Horn
• Profession: Lawyer
• Pages: 513-535

513

Inter vivos, marital-deduction dispositions in trust are an alternative to outright gifts.

They can permit the use of the nonportable exemptions that a less pecunious spouse

otherwise could not use if he or she were to die rst. Dispositions in trust permit the

donor to control the management and the ultimate disposition of the property.

The primary inquiry is the extent to which inter vivos, marital-deduction dispositions

in trust can, and cannot, include exibility. The issues appear primarily in two contexts.

The rst relates to the extent to which the donor spouse can control the trust estate dur-

ing and after the life of the donee spouse without disqualifying the gift for the marital

deduction. The second relates to the extent to which the donor can benet from and

control the property after the death of the donee without including the property in the

gross estate of the donor.

I. QUALIFICATION FOR MARITAL DEDUCTION:

ABILIT Y OF DONOR TO CONTROL DURING

LIFE AND A FTER DEATH OF DONEE

The marital deduction is a sine qua non of the use of interspousal transfers to enable a

less pecunious spouse to use his or her transfer tax exemptions even if he or she dies

rst. However, the donor who during his or her life creates a trust that is to qualify for

the marital deduction because of the general power of the donee spouse to appoint or

because of a QTIP election cannot retain any ability to establish or alter benecial enjoy

-

ment, regardless of whether the power is exercisable during the life or only after the death

of the donee. An “ability to establish or alter benecial enjoyment” was a “power” as

dened in Code Section 2613(d) of the generation-skipping tax before the Tax Reform

Act of 1986. The concept is used here as a short-hand description of the type of ability

that a donor cannot retain in a trust if the trust is to qualify for the marital deduction

for gift tax purposes. The problem that a power presents for the marital deduction is not

an issue in the case of marital arrangements that a property owner creates at the time

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Inter Vivos Marital Dispositions

Chap ter 17514

of his or her death. Similarly, it is not an issue in the case of an outright gift to a spouse

during the life of the donor.

Some argue that the conclusion stated in the preceding paragraph does not apply if

the donor creates the power. They assert that the conclusion applies only if the donor

receives the power from a third party. See Jonathan G. Blattmachr, Diana Zeydel & Mitch-

ell Gans, The World’s Greatest Gift Tax Mystery, Solved, 115

tax notes

243 (Apr. 16, 2007);

Richard Covey & Dan Hastings, IRC Sec. 2523(f)—Lifetime Qualied Terminable Interest

(QTIP) Trusts and Permissible Principal Interests of Donor Spouse,

PRaCtiCal dRafting

, Apr.

2007, at 8881-88. This writer nds the argument inconclusive and counsels the conser-

vative course for planning purposes.

A person who owns property in fee simple absolute can create a power with respect

to the property and can transfer the property and retain the power. Similarly, a person

who possesses an interest and a power can transfer the interest and retain the power.

Again similarly, a person who possesses only a power can exercise the power to trans-

fer the property subject to the retention of a power. Although the example at Treasury

regulations section 25.2523(b)-1(d)(3) appears to illustrate the last type of retained

power, “retains” in Treasury regulations section 25.2523(f)-1(a)(1) and “retained” in

Treasury regulations section 25.2523(b)-1(d)(3) appear consistent with the application

of the principle of the example to each of the types of retained powers. Accordingly, for

planning purposes, the writer counsels treating the principle as equally applicable to

each type of retained power.

Yet another type of power contrasts with the various types of retained powers. This

type is a power that the donor receives from a third party after the donor transfers the

property. Arguably, not being a retained power, this type of power does not prevent quali-

cation for the marital deduction.

A power that the donor retains prevents the transfer from qualifying for the marital

deduction, at least unless the power is a duciary power limited by an ascertainable stan-

dard. According to Code Section 2523(b)(2), a power that the donor retains to allow an

appointee to enjoy the property after the termination of the interest of the donee spouse

prevents the transfer to the donee spouse from qualifying for the marital deduction:

(b) Life Estate or Other Terminable Interest.—Where, on the lapse of time, on

the occurrence of an event or contingency, or on the failure of an event or contin-

gency to occur, such interest transferred to the spouse will terminate or fail, no

deduction shall be allowed with respect to such interest—

(1) if the donor retains [(emphasis added)] in himself, or transfers or has

transferred (for less than an adequate and full consideration in money or

money’s worth) to any person other than such donee spouse (or the estate of

such spouse), an interest in such property, and if by reason of such retention