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Marital Deduction – Section 2056

Marital Deduction – Section 2056. General Rule: All interests passing to surviving spouse deductible from gross estate to extent included in gross estate. The “Unlimited Marital Deduction” Exceptions: 1. Life estate or terminable interest.

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Marital Deduction – Section 2056

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  1. Marital Deduction – Section 2056 • General Rule: All interests passing to surviving spouse deductible from gross estate to extent included in gross estate. The “Unlimited Marital Deduction” • Exceptions: • 1. Life estate or terminable interest. • 2. Interest acquired for S pursuant to directions of D. • Exceptions to Exceptions: • 1. Limited survivorship period condition. • 2. S has life estate in income and power of appointment. • 3. Life insurance or annuity payments to S with S having power • of appointment. • 4. Qualified terminable interest property. • 5. Charitable remainder trust – S is only non-charity, non-ESOP • beneficiary of CRT. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  2. Terminable Interest Under 2056(b)(1) • Three requirements: • Interest to SS lapse or fail on lapse of time or event or contingency or on failure of event or contingency to occur. • Interest in property passes for less than full consideration to person other than SS or estate of SS. • Such person may possess or enjoy property after SS’s interest terminates or fails. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  3. Qualified Terminable Interest Under 2056(b)(7) • Three requirements: • Property passes from D. • SS has qualifying income interest for life. • - All income for life payable annually or more frequent. • - No person has power to appoint for any person other than SS. • Not apply to power on SS’s death. • 3. Executor makes election to claim marital deduction. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  4. Problem 14 (1) • Each spouse’s unified credit enough to cover each spouses • estate. Consider bypass trust: • Surviving spouse (SS) trustee. • All income to SS or distributee per ascertainable standard. • Invade corpus per ascertainable standard. • 5-5 power to invade at specific time during year. • Children could be beneficiaries. • Creditor protection. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  5. Problem 14 (2) • Facts: D dies, leaves Blackacre to A for life, remainder to B. Residuary to spouse. A and B disclaim. • Since all to S, all qualify for marital deduction. • Postmortem planning. • If C gets residuary and A & B direct to S, no martial • deduction. Gift from A & B. • c) If D’s unified credit will be wasted, SS might want to disclaim to a child or trust to fully utilize credit. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  6. Problem 14 (3) • Facts: D and S own Blackacre as tenants by the entirety. Purchased in 1990. D dies. • D interest pass to S, qualifies for marital deduction. • Half qualifies for marital deduction because only half in estate. • What is significance of 1990? Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  7. Problem 14 (4) • Facts: D dies. Estate in trust for parents’ lives, then to S. • Any marital deduction? • Remainder interest of SS qualifies. Deduction available even if another has prior terminable interest. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  8. Problem 14 (5)(a) • Facts: D sells blackacre to child C for 50k, retains possession for term of yrs. FMV of remaining interest is 50k. D dies, leaves remaining 10 year possession interest to S. • S’s interest terminates with lapse of time and D passed interest to third party who will possess after S, BUT • C paid full consideration so 2056(b)(1) conditions not met. • So, deduction under 2056 available. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  9. Problem 14 (5)(b) • Facts: D gifts blackacre to child C, retains possession for term of yrs. D dies, leaves remaining 10 year possession interest to S. • S’s interest terminates with lapse of time and D passed interest for no consideration to third party who will possess after S. • This nondeductible terminal interest. No exceptions apply. • No Q-tip election available because S not possess for S’s life. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  10. Problem 14 (5)(c) • Facts: D by will orders executor to buy 100k life annuity for S. • No deduction under Reg. 20.2056(b)-7(b)(1)(I). This is a terminal interest that does not qualify for deduction. • What impact if D leaves 100k to S and requests she buy annuity, and she honors request? Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  11. Problem 14 (6) • Facts: D by will creates trust for S. T is to pay to S such portion of income S deems desirable and all accumulated income and corpus goes to S’s estate. • Deduction available under 2056. No interest passes to any person other than S or S’s estate and requirements of 2056(b)(1)(A) not met. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

  12. Problem 14 (7) • Facts: D by will leaves all to S, but redirecting to C if S doesn’t live long enough to probate D estate. • No deduction. S’s interest could be terminated on happening of an event. Note, deduction would be available under 2056 if period of survivorship not exceed 6 months. Law T510 - Estate and Gift Tax- Instructor: Dwight Drake

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