Unified Credit Funding Technique Approved By IRS

By David M. First

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A common 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.

In 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.

In 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.

The 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.

The 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.

No 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.

Upon 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.

The 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 CST.

Thus, 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.

The 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.

As in any plan, it is important that all elements of the plan be implemented to ensure the desired outcome.

David M. First, CPA, MS, is a tax partner at Marcum and Kliegman LLP.




















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