Association of American Law Schools
2001 Annual Meeting
Wednesday, January 3, 2001 - Saturday, January 6, 2001
San Francisco, California

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Saturday, January 6, 2001, 10:30 a.m.–12:15 p.m.
Section on Donative Transfers, Fiduciaries and Estate Planning

The Popular QTIP Marital Deduction: Sexism in Estate Planning?

THE ADVANTAGES OF QTIP
by Martin D. Begleiter
Professor of Law
Drake University Law School
Des Moines, Iowa

  1. THE FEDERAL ESTATE TAX
    1. Computed on gross estate less deductions, plus certain lifetime gifts.
    2. The most significant deduction is the marital deduction.
      1. All property given or bequeathed to a spouse, in the correct form, qualifies.
      2. Three major forms of marital deductions
        1. Outright
        2. Life Estate or income interest with general power of appointment—§ 2056(b)(5).
        3. QTIP—§ 2056(b)(7) & 2523(f)(2).

  2. QTIP REQUIREMENTS
    1. The surviving spouse must receive a qualifying income interest for life in property which passes from the decedent.
    2. No one can have a power to appoint any of the property to any person other than the surviving spouse during the surviving spouse's lifetime.
    3. Executor elects QTIP treatment.
    4. The estate receives a deduction for the full value of the trust, even though the surviving spouse receives only the income for life. Example: $2,000,000 bequeathed in a QTIP trust. The surviving spouse's life interest, valued actuarially, equals $1,200,000. Marital deduction--$2,000,000.
    5. The value of the trust is included in the surviving spouse's estate at death—§ 2044.

  3. CONTROL BY THE DECEDENT

  4. PROMOTING FAMILY HARMONY IN SECOND MARRIAGES

    Children from the first marriage can form a relationship with second spouse without fear of loss of inheritance.

  5. AGGREGATION—CONTROL PREMIUMS AND MINORITY DISCOUNTS
    1. Example of Control Premium—90% of a $2,000,000 corporation may be worth more than $1,800,000.
    2. Example for discussion—Decedent owns 90% of a closely held corporation. She bequeaths 45% to H and 45% to a QTIP. What happens when H dies?
      Estate of Bonner, 84 F.3d 196 (5th Cir. 1996).
      Estate of Mellinger, 112 T.C. 26 (1999).

  6. THE WAIT AND SEE ADVANTAGE

    Robertson's Estate v. Commissioner, 15 F.3d 779 (8th Cir. 1994).
    Estate of Clayton, 976 F.2d 1486 (1992).
    Estate of Clack, 106 T.C. 131 (1996).
    Treas. Reg.§ 20.2056(b)-7(d)(3)(i).

  7. THE REVERSE QTIP—DON'T FORGET THE PIGS—IRC § 2652(c)(3)

    Example—A couple owns 2,000,000, all owned by W. She decides on an optimum marital deduction will. $1,325,000 is bequeathed to H outright and $675,000 (if she dies this year) goes to a credit shelter trust, with income to be paid in the discretion of the trustee to H and W's issue, with remainder to W's grandchildren on the death of W's last child.

    Result: W wastes $355,000 of her $1,030,000 generation skipping exemption.

    What would have happened if W bequeathed $355,000 in a QTIP trust?

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