Special Dispositive Provisions Miscellaneous

• Author: Jerold I. Horn
• Profession: Lawyer
• Pages: 315-330

315

I. TAX ELECTIONS AND BENEF ICIAL IN TERESTS

The Internal Revenue Code allows the executor of the will of a decedent to elect to value

the gross estate on the date of death or on the alternate valuation date, to deduct cer-

tain costs of administration for estate tax purposes or income tax purposes, to qualify

terminable interest property for the marital deduction, to value certain real property

according to a special formula or at fair market value, to pay or to defer payment of

estate tax, to make an unused estate tax exemption available to a surviving spouse, and

to allocate the GST exemption of a transferor for generation-skipping tax purposes. Each

election inherently can affect the amount of tax. Thus, an election inherently can affect

the aggregate amount that is available for beneciaries.

More importantly for purposes of this discussion, the ability of an executor to elect

can include the ability to determine the amount that is available to a beneciary. If the

power to elect inherently includes the power to determine how much the power holder

receives, all of the issues of tax sensitivity can exist for transfer tax purposes.

The writer is not aware that the IRS ever has asserted that a power to elect that inheres

in the Internal Revenue Code is a general power of appointment or that the exercise or

release of a power to elect produces a transfer for estate or gift tax purposes. Congress

specically granted the power to elect. Congress presumably was aware that the ability

to affect benecial enjoyment inheres in the power to elect. Therefore, Congress presum-

ably did not intend this ability to be tax-sensitive in the hands of a power holder who has

a benecial interest. Nevertheless, the draftsperson should appreciate that arguments

that purport to distinguish between powers that are and are not tax-sensitive are subtle

and that a taxpayer might have to resolve the issue at some level of review.

Will and trust forms distributed by banks often have provided that the duciary either

shall not or may, but need not, make any adjustment because of an election. If applicable law

otherwise requires an adjustment, this formulation tends to expand the ability of a power

holder to affect benecial enjoyment. The expanded ability does not inhere in the power to

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Special Dispositive Provisions

Miscellaneous

Chapter 12316

elect. Rather, it is derived from the governing instrument. The arguments that are available

with respect to the ability that inheres in the power to elect, per se, are not available with

respect to any additional ability that is derived from the governing instrument. Therefore,

the draftsperson either should avoid allowing any benecially interested executor to make

tax elections free of constraints under state law or should consider mandating particular

elections, or mandating adjustments or no adjustments, under particular circumstances.

II. IRR EVOCABLE INSUR ANCE TRUSTS

A. Form 12.1: Payment of Death Costs

Section 3.01. Taxes. If any of the trust estate is included in my gross estate for pur-

poses of determining the United States estate tax payable because of my death, the

Trustee shall pay the estate and inheritance taxes (including any interest and pen-

alty) that are payable because of my death, in such amounts, if any, as these items

are increased because of inclusion of the trust estate in my estate for such death

tax purposes. The Trustee shall make the payments directly or to my personal rep-

resentative, without apportionment or reimbursement, from principal of the trust

estate so included, as an expense of administration.

a [Notwithstanding the preceding portion of this Section, I apportion to, and the

Trustee shall pay (or obtain reimbursement) from, principal of each disposition

(or, when functionally signicant, share or portion) according to Section 3.02

the amount, if any, by which the disposition (or share or portion) increases the

estate and inheritance taxes, interest and penalty payable because of my death.

Notwithstanding anything to the contrary, the Trustee shall not make any pay-

ment from any property that is elected to qualify for the marital deduction for

purposes of determining any estate tax payable because of my death.]

b [If any of the trust estate is included in the gross estate of my wife for purposes of

determining the United States estate tax payable because of the death of my wife,

the Trustee shall pay the estate and inheritance taxes (including any interest and

penalty) that are payable because of the death of my wife, in such amounts, if any, as

these items are increased because of inclusion of the trust estate in the estate of my

wife for such death tax purposes. The Trustee shall make the payments directly or to

the personal representative of my wife, without apportionment or reimbursement,

from principal of the trust estate so included, as an expense of administration.]

B. Purpose of Form 12 .1

If any of the trust estate of the irrevocable trust happens to be included in the gross

estate of the insured, the insured might want to obligate the trustee to use some of the

included property to pay death costs that become payable because of his or her death.