Credit Funding Technique Approved By IRS
David M. First
estate planning problem involves the maximum unified credit
for a married couple when one spouse owns most or all of the
assets. This uneven ownership of wealth is not uncommon, especially
when the spouse who owns the bulk of the assets does not want
to relinquish control. As the unified credit amount increases
to $3,500,000 in 2009, it becomes even more important for
each spouse to have assets available to exhaust as much of
the unified credit as practicable, taking into account the
combined wealth of the couple.
PLR 2004-03094, the IRS approved an interesting technique
that allows the wealthier spouse to retain control over
assets while both spouses are alive; and simultaneously
provides for each spouse’s maximization of the estate
tax exemption, regardless of how ownership of the family
assets is divided between them.
this ruling, the husband created a revocable trust with
assets owned by him. Under the terms of the trust, the husband
reserves certain rights, including the right to amend or
revoke the trust and to withdraw income or principal. The
husband’s rights will be suspended while he is absent
for reasons specified in the trust or while he is incompetent
under procedures specified in the trust. During the husband’s
life, the trustees will pay him any income or principal
they consider necessary or advisable for his best interests.
If the husband’s personal rights are suspended, the
trustees will also pay any income or principal the trustees
consider necessary or advisable for the health, education,
support, and maintenance of the husband’s descendants,
as well as his wife. The trust provides that, if the wife
survives the husband, the trustees will distribute to the
wife—after the payment of taxes, administration expenses,
and other costs—as a “marital gift” a
fraction (determined under a formula) of the residue of
the trust. The balance of the residue will be held as the
husband’s credit shelter trust (CST). Any portion
of the marital gift that the wife disclaims will be held
as part of the husband’s CST. If the wife does not
survive the husband, the entire residue will be held as
the husband’s CST.
trust further provided that, if the wife died while the
husband was still alive, she would have a general power
of appointment (GPOA) to appoint assets out of his trust.
The trust assets distributed in satisfaction of the wife’s
exercise of this power will be selected by the trustee and
valued as of the wife’s date of death. The GPOA was
limited to the amount required for the wife to use her remaining
applicable exclusion amount after taking into account the
value of her taxable estate, excluding the assets subject
to the power.
wife executed a will whereby she exercised this GPOA in
favor of her estate and provided for the funding and creation
of a credit shelter trust (CST) for the benefit of the husband
and her descendants. The will provides that, during the
husband’s life, he will receive any of the income
and principal of the wife’s CST that the trustees
deem necessary or advisable for his health, education, support,
and maintenance. The trustees may also pay any income and
principal they judge necessary or advisable for the health,
education, support, and maintenance of the husband’s
descendants. If the wife’s CST holds her residence,
the husband will have the exclusive use of that residence
for life or until the trustees determine that the residence
is no longer needed for such purpose.
rent or other costs will be charged to the husband, and
the trustees will pay all of the expenses of maintaining
the residence. The trustees may not sell the residence without
the husband’s consent, unless he is disabled. If the
residence is sold, the trustees may purchase or build a
replacement residence to which the above provisions will
apply. The husband is granted a testamentary special power
to appoint the assets of his wife’s CST remaining
at his death to any of his descendants.
the death of the survivor of the wife and the husband, any
assets of the wife’s CST that the husband does not
appoint will be distributed to the wife’s still living
descendants, per stirpes, or one-half to the wife’s
heirs and one-half to the husband’s heirs determined
under state law as if the wife and the husband had each
died on that date as residents of that state. The husband
is named as the trustee of all trusts to be established
under the will, with two individuals named as successors.
IRS’ ruling in PLR 2004-03094 held the following:
If the wife predeceases the husband, the assets in the
husband’s trust over which the wife has GPOA will
be included in her gross estate under IRC section 2041,
and she will be considered the property’s transferor
for federal estate tax purposes.
On the wife’s death, the husband will have made
a completed gift to her that qualifies for the federal
gift tax marital deduction under IRC section 2523.
None of the assets that originated in the husband’s
trust will be includible in his gross estate under IRC
section 2036, because those assets will be transferred
to the CST by the wife and not by the husband.
Assets that originated in the trust and that pass to the
CST under the wife’s will will not constitute a
gift from the husband to the other beneficiaries of the
the husband has used the trust to retain control of property
and is assured that the wife will have sufficient assets
to take advantage of her unified credit should she predecease
him. Although this new technique may be cumbersome to some,
it should be a part of effective planning techniques.
ruling does not address what happens if the wife does not
exercise the GPOA. In that case, it would seem that the
property subject to the GPOA will still be included in her
estate, utilizing her remaining tax exemption, but would
probably also be included in the husband’s estate
due to his power to revoke the trust.
in any plan, it is important that all elements of the plan
be implemented to ensure the desired outcome.
M. First, CPA, MS, is a tax partner at Marcum and