Technical advice shows how to lose a marital deduction.

• Author: Drudy, Phillip P.
• Position: Technical Advice Memorandum 9610004 - Brief Article

IRS Letter Ruling (TAM) 9610004 is a good example of how tax planning can sometimes backfire. In the ruling, a decedent (D) died testate. His will established two trusts, a bypass trust and a power of appointment marital trust. D's spouse (S) would receive all of the income from the marital trust, and discretionary distributions of income and principal from the bypass trust.

Shortly after D's death, S and their two children petitioned the local court, requesting authority to withhold the will from probate and to administer the estate as if D had died intestate. The court granted the petition. Under state law, all of D's assets passed to S free of any trust.

In filing the estate tax return for D's estate, the personal representatives claimed a marital deduction for all of the estate assets, as they all passed to S by virtue of the agreement not to file the will. The agent examining the estate tax return challenged this treatment.

The Service ruled that none of D's assets qualified for the marital deduction. Under Sec. 2056(a), a marital deduction is allowed for any interest in property which passes or has passed from the decedent to the surviving spouse. The estate tax regulations recognize interests that pass to a spouse as a result of the settlement of a controversy. The controversy must involve the recognition of a spouse's enforceable rights in a decedent's...