Tools of the Trade - Estate Planning Council (B0519491).DOC

Thus, the surviving spouse can take the decedent’s DSUEA intoaccount when determining the surviving spouse’s gift or estate taxliability.. DSUEA generally is the deceased spouse’s basic

TOOLS OF THE TRADE — Estate and Gift Techniques Following Recent (and

Possible) Law Changes

Estate Planning Council Birmingham, Alabama

January 3, 2012

C Fred Daniels (205) 716-5232 cfd@cabaniss.comLeonard Wertheimer (205) 716-5254 lw@cabaniss.comAnna F Buckner (205) 716-5245 afb@cabaniss.comCabaniss, Johnston, Gardner, Dumas & O’Neal LLP

2001 Park Place North, Suite 700Birmingham, Alabama 35203

LEONARD WERTHEIMER, III — Leonard Wertheimer is a partner in the

Birmingham, Alabama office of Cabaniss, Johnston, Gardner, Dumas, & O’Neal LLP,where his practice is concentrated in the areas of estates and trusts, tax litigation, andclosely-held businesses He received his B.S degree from the University of Virginia andhis J.D degree from the Emory University School of Law Mr Wertheimer is a Fellow inthe American College of Trust and Estate Counsel and is a Member of the Alabama LawInstitute He was a member of the Alabama Law Institute committees that revisedAlabama’s Probate Code, Principal and Income Act (chairman) Estate Tax ApportionmentAct (chairman), Trust Code and Power of Attorney Act Mr Wertheimer is currentlyserving as chairman of the Alabama Law Institute committee preparing legislation to

authorize the use of unitrusts In addition to being listed in Best Lawyers since 1987 in the field of Trusts and Estates he was named by Alabama Super Lawyers magazine as one

of the best attorneys in Alabama in Trusts and Estates and has a Preeminent AV ratingwith Martindale Hubbell Mr Wertheimer is a frequent speaker at professional seminarspresenting topics relating to estate planning, estate administration, business successionplanning, generation-skipping tax planning and distributions from IRAs and qualifiedplans Mr Wertheimer is a former Adjunct Professor of the Masters in Tax AccountingProgram at the University of Alabama School of Business as well as a former AdjunctProfessor of the Birmingham Southern College School of Business

ANNA FUNDERBURK BUCKNER — Anna Buckner is a partner in the

Birmingham, Alabama office of Cabaniss, Johnston, Gardner, Dumas & O’Neal LLP,where she practices in the areas of estates and trusts, including estate planning andadministration, taxation, real estate and corporate law A former professional tennis

player, Mrs Buckner attended Auburn University (B.S., cum laude, 1993; M.B.A., 1995) and Cumberland School of Law (J.D., magna cum laude, 1999) Mrs Buckner is trained

in Collaborative Practice She is a member of the International Academy ofCollaborative Professionals (IACP), a consortium of lawyers, financial professionals andmental health professionals who are committed to helping resolve civil and domesticrelations disputes in a collaborative manner outside traditional legal forums She is also amember of the Birmingham Collaborative Alliance, serving on the training committee.For more information about this aspect of her practice, seewww.collaborativepractice.com Mrs Buckner is a licensed real estate agent, and aformer member of the National Association of Realtors and the Birmingham Association

of Realtors She is a member of the Alabama, Birmingham and American BarAssociations and participates in the Sections on Business Law, Taxation, and RealProperty, Probate and Trust Law Mrs Buckner currently serves on the Board for theMake-A-Wish Foundation of Alabama and she also served on the Cumberland School ofLaw Annual Fund Committee and is a member of the Kiwanis Club of Birmingham She

member of the Charter Class of the Alabama State Bar Leadership Forum in 2005 Shehas also been an adjunct professor at Cumberland School of Law teaching Real EstateTransactions Mrs Buckner is a member of the Birmingham Estate Planning Counseland the Alabama and National Associations for Charitable Planned Giving She is amember of the Alabama Law Institute where she was a member of the committees thatrevised the Alabama Prudent Investor Act, the Alabama Uniform Trust Code, the UniformPrudent Management of Institutional Funds Act, and the Alabama Durable Power ofAttorney Act She currently serves on the Alabama Law Institute Unitrust Act Committeeand is an Alabama Law Institute Counsel Member Mrs Buckner frequently lectures onestate planning topics locally and regionally She serves on the Board of Trustees of theAmerican Institute on Federal Taxation and is a Fellow in the American College of Trustand Estate Counsel (ACTEC) where she also serves on the Fiduciary LitigationCommittee.

-TOOLS OF THE TRADE — Estate and Gift Techniques Following Recent (and Possible) Law Changes

C Fred Daniels *

Presented by Leonard Wertheimer and Anna F Buckner

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act

of 2010 (“TRUIRA 2010”) increased the estate tax exclusion amount to

$5,000,000 for decedents dying in 2011 and 2012 and indexed it for inflation.There is a possibility that the $5,000,000 applicable exclusion amount mightcontinue after 2012 It is not likely that it will be reduced below $3,500,000,although a failure by Congress to act will result in a $1,000,000 applicable exclu-sion amount

It is often perceived that only in the last decade has the estate tax beenconstantly changing As indicated in the table below, there have only beentwo periods when there was not constant change — 1948 to 1976 and 1987

* Unless otherwise indicated—

Section references refer to the Internal Revenue Code of 1986, as amended; and

Regulation references refer to sections of the Treasury Regulations.

The reader is cautioned that there can be uncertainty in the interpretation and application of tax and other law, and much of what is expressed herein is the opinion of the author and others The reader must make an independent determination as to the proper interpretation and application of tax and other law to the matters discussed herein The reader is further cautioned not to rely on forms and clauses in these materials “as is” but to determine independently the appropriateness of each form and clause together with its compliance with applicable law.

Qualified disclaimers authorized

the estate tax law in 1948 for non-community property, and it led to

marital formula wills for couples whose combined net worthexceeded what was then $60,000.00 exemption from estate tax. 1

marital formula was to give 50% of the so-called adjustedtaxable estate to what is now called a credit shelter trust and

to give the remainder outright to the spouse or to a maritaldeduction trust that included a general power of appoint-ment.2 This practice created the need to equalize a husband’sand wife’s separate estates, but equalization often involvedgift tax consequences because the gift tax marital deductionwas only 50%, not unlimited

increased the marital deduction to the greater of $250,000 or50% Marital formulas were modified accordingly

(c) Formulas after the Unlimited Marital Deduction The

Economic Recovery Act of 1981 added the unlimited maritaldeduction effective 1982, and the formula changed dramati-cally The predominant formula allocated the maximumexempt amount to the credit shelter trust and the balance, ifany to the surviving spouse

the marital deduction to qualified terminal interest property(“QTIP”) Thereafter, martial trusts tended to be in the form ofQTIP trusts instead of pay-all-income trusts coupled with a generalpower of appointment

3. Lifetime Gifts and Unification There was an independent gift tax

until 1977 that had a $30,000.00 lifetime exclusion and rates thatwere three-fourths of the estate tax rates This resulted in an incen-tive to use the lifetime exclusion rather than lose it and also to takeadvantage of the lower gift tax rates The 1976 Tax Reform Act

1 The theory of the 50% marital deduction was to give decedents in common law statesthe same tax advantage that was attained in community property states Joint income taxreturns were added at the same time for the same reason Without these changes, the taxlaws were an incentive for common law states to change to community property, andmany did

2 Qualified terminal interest property (“QTIP”) trusts were not available until 1982

unified the estate tax and the gift tax by replacing the gift tax andestate tax exclusions with a unified credit against the combined taxesand increasing the amount exempted in annual steps from

$60,000.00 in 1976 to $175,000.00 in 1981 Various enactmentssince then gradually increased the exempt amount to $5,120,000,after the 2012 inflation adjustment Unification eliminated thedifferential between estate and gift tax rates

(a) Gifts of Future Income and Growth Notwithstanding

unification, lifetime gifts continue to remove future incomeand growth for the donor’s estate, which is a valuable tech-nique

(b) Eliminate the Tax on a Tax The estate tax base includes the

funds that a decedent’s estate uses to pay the estate tax, i.e., a

tax on a tax If a gift is made that results in the payment ofgift tax and the donor outlives the gift by three years, the gifttax is excluded from the transfer tax base, thereby eliminating

the tax on tax See § 2035(b) (inclusion of gift tax on gifts

made during 3 years before death)

the estate tax marital deduction was only 50% until 1977, itwas popular for an insured’s spouse to be designated as theowner and beneficiary of the insured’s life insurance Thisceased to be useful in 1982 when the marital deductionbecame unlimited

(b) Irrevocable Life Insurance Trusts A prevailing technique

throughout most of the history of the estate tax has been theirrevocable life insurance trust They were made more effec-tive by the Ninth Circuit Court of Appeals decision in

Crummey v Comm’r, 397 F.2d 82 (9th Cir 1968), thatconfirmed that trust additions coupled with a withdrawal werepresent gifts that qualify for $13,000 annual gift tax exclu-sion

5. Disclaimer Trust Planning If a couple’s combined estate was close

to the exempted amount, one technique that has been available since

1982 is to devise the estate to the surviving spouse, but provide that,

if the spouse disclaims, the disclaimed assets are devised to a credit

shelter trust See § 2518.

6. Generation-Skipping The Tax Reform Act of 1986 added the

generation skipping-transfer tax and its exemption This resulted incomplex dynasty trusts designed to utilize the GST exemption

II. PORTABILITY; GREAT FOR CLIENTS, DANGER FOR ADVISORS.

Commentators often claim that husbands’ and wives’ exemptions from estate taxare twice the exclusion amount A $5,000,000 exclusion amount supposedlymeans that a husband and wife have $10,000,000 exempt from estate tax.3 To

“double” the exemption prior to 2011, however, it was necessary that the assets beproperly titled between the husband and wife and that the first spouse to die have amarital formula will — a will that contained a “credit shelter trust” to which anamount equal to the deceased spouse’s exclusion amount was devised The TaxRelief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010(“TRUIRA 2010”) attempts to achieve the same result without trusts and tosimplify the preservation of both spouses’ exclusion amounts by introducing port-ability However, practitioners representing small estates, preparing pre-nuptialagreements or seeking a substantial wrongful death award for a decedent’s spousemay find themselves in the cross-hairs of a malpractice action if they fail to recog-nize the weaknesses of estate tax portability Temporary regulations on the porta-bility of a deceased spousal unused exclusion amount (“DSUEA”) for estate andgift tax purposes were issued on June 15, 2012 REG-141832-11 The text of thetemporary regulations also serves as proposed regulations

TRUIRA 2010 amended § 2010(c) to provide that the surviving spouse’sestate tax applicable exclusion amount is the sum of the surviving spouse’s

“basic exclusion amount” ($5,000,000, indexed beginning in 2012 forinflation from 2010), plus a “deceased spousal unused exclusion amount”(“DSUEA”) § 2010(c)(2), as amended by TRUIRA 2010 § 303(a)

1. Application to Gifts Portability also applies to the gift tax

exemp-tion § 2505(a)(1), as amended by TRUIRA 2010 § 303(b)(1)

3 The $5,000,000 applicable exclusion amount was increased to $5,120,000 in 2012 by

an inflation adjustment For the purpose of simplicity, this discussion of portabilitygenerally ignores the inflation adjustment and refers to the applicable exclusion amount

as $5,000,000 in all relevant years

Thus, the surviving spouse can take the decedent’s DSUEA intoaccount when determining the surviving spouse’s gift or estate taxliability Reg §§ 20.2010-3T(a) and 25.2505-2T(a).

2. Not Available for Generation-Skipping Transfer Taxes The

generation-skipping transfer tax exemption is not portable

CAVEAT: A credit shelter trust with generation-skipping tax features must still be used to take advantage of the GST exemp- tion of the first spouse to die.

DSUEA generally is the deceased spouse’s basic exclusion amount (e.g.,

$5,000,000 in 2010, $5,120,000 in 2011) in excess of the sum of the

deceased spouse’s taxable estate plus adjusted taxable gifts other than

taxa-ble gifts on which the deceased spouse paid gift tax § 2010(c)(4)(B)(ii);Reg § 20.2010-2T(c)(1) and (2)

1. Examples The following examples illustration the DSUEA

calcula-tion

adjusted taxable gifts dies in 2012 and leaves his or her entireestate to the surviving spouse, the decedent’s taxable estatewill be $0.00 due to the estate tax marital deduction

(i) If there are no adjusted taxable gifts, the DSUEA is

$5,120,000, irrespective of the size of the deceasedspouse’s estate

(ii) The surviving spouse then has a $10,240,000

exemp-tion from estate tax if he or she dies in 2012, not just

$5,120,000

(b) Testamentary Non-Marital Gift If the deceased spouse in

the above example had left $200,000 to his or her childrenand the balance to the spouse, the DSUEA would be

$4,920,000, because the deceased spouse’s taxable estatewould have been $200,000

(c) Inter Vivos and Testamentary Non-Marital Gifts If the

deceased spouse in the above examples had also made a

$1,000,000 adjusted taxable gift in 2002 (when the applicable

exclusion amount was $1,000,000), the DSUEA would be

$3,920,000 ($5,120,000 - $200,000 testamentary gift to dren - $1,000,000 adjusted taxable gifts)

chil-(d) Inter Vivos Gifts that Required Payment of Gift Tax If the

deceased spouse in the above examples had also made a

$1,500,000 adjusted taxable gift in 2002, the DSUEA is still

$3,920,000 ($5,120,000 $1,000,000 adjusted taxable gifts

-$200,000 testamentary gift to children) because the $500,000portion of the $1,500,000 adjusted taxable gift that was taxed

in 2002 is ignored See Reg § 20.2010-2T(c)(5), Example 3.

2. Using the DSUEA Line 9(b) on the first page of the 2012 contains

an entry to claim the DSUEA The amount to be claimed is lated on page 4 at Section D, Part 6—Portability of DeceasedSpousal Unused Exclusion. 4 See Appendix “A”.

calcu-3. Effect of Tax Credits The temporary regulations do not address the

impact of available credits — § 2013 credit for tax on prior transfers,

§ 2014 credit for foreign death taxes, and § 2015 credit for deathtaxes on remainders The Treasury and the IRS requested comments

to assist in issuing future guidance

applicable estate tax exclusion amount, DSUEA acquired from apredeceased spouse is not indexed for inflation following his or herdeath

5. Possibility of Re-Enactment Although portability is to expire on

December 31, 2013, the President’s budget proposals call for it to be

continued indefinitely thereafter PREDICTION: Because the

same result can be obtained by using a credit shelter trust, theCongressional revenue estimate for continuing portability is that

there is no revenue loss, thus enhancing the likelihood for

reenactment.

4 The 2012 Estate Tax Return form, revised August, 2012, was posted October 4, 2012.The instructions were posted October 12, 2012

C. Estate Tax Return Requirement.

A deceased spouse’s DSUEA is not available unless the deceased spouse’sestate files an estate tax return and makes an election to permit the surviv-ing spouse to utilize the unused exemption § 2010(c)(5)(A), as amended

by TRUIRA 2010 § 303(a); Notice 2011-82, 2011-42 I.R.B 516

1. Portability Elected by Making Required Computation on Estate

Tax Return The election is not made by checking a box on the

return Instead, the election is made by including the DSUEAcomputation on the estate tax return Reg § 20.2010-2T(b)(1) Atransitional rule provides that the IRS will deem the requiredcomputation of the decedent’s DSUEA amount to have been made

on an estate tax return that is considered complete and properlyprepared Notice 2011-82

(a) Part 6—Portability of Deceased Spousal Unused Exclusion

(DSUE), page 4 of the 2012 IRS Form 706 sets forth ules for the computation

sched-(b) The temporary regulations clarified that, after the IRS revised

the prescribed form for the estate tax return to expresslyinclude the computation of the DSUEA amount, executorsthat previously filed an estate tax return pursuant to the tran-sitional rule are not required to file a supplemental estate taxreturn using the revised form

(c) The estate tax return must be timely filed, including

exten-sions actually granted Reg § 20.2010-2T(a) Althoughestate tax returns are not required for gross estates that areless than the applicable exclusion amount, timely filing forportability purposes is determined as though the deceasedspouse’s gross estate exceed the applicable exclusion amount

2. Complete and Properly Prepared Estate Tax Return An estate tax

return prepared in accordance with all applicable requirements isconsidered a “complete and properly-prepared” estate tax return.Reg § 20.2010-2T(a)(7)(i)

3. Electing Out of Portability An election out of portability is made

by an affirmative statement on the estate tax return signifying thedecision to have the portability election not apply Reg § 20.2010-2T(a)(3) Although there is not a box on the 2012 IRS Form 706 to

elect portability, Section A of Part 6 has a check block to elect out ofportability Not filing a timely return is also considered to be anaffirmative statement signifying the decision not to make a portabil-ity election.

4. Reduced Reporting Requirements for Certain Property If an estate

tax return is not otherwise required, the executor does not have toreport the value of certain property that qualifies for the marital orcharitable deduction Reg § 20.2010-2T(a)(7)(ii)

(a) Information Required Instead, the executor will only report

the description, ownership, and beneficiary of the property,along with other information necessary to establish the right

of the estate to the marital or charitable deduction Reg

§ 20.2010-2T(a)(7)(ii) This is done by listing each item ofproperty on the appropriate schedule but not reporting its

value in the columns that are used for non-marital deduction

and non-charitable deduction property The aggregate value

is then reported on a separate line of Part 5–Recapitulation as

an asset and then on another separate line as a deduction

(b) Exceptions Limited reporting for marital or charitable

deduction property is not available if—

(i) The value of the property relates to, affects, or is

needed to determine, the value passing from the

dece-dent to another recipient (e.g., there is a formula

bequest);

(ii) The value of the property is needed to determine the

estate’s eligibility for the provisions of §§ 2032,2032A, 6166, or another provision (these relate toalternate valuation, special valuation of farm property,and extension of time to pay);

(iii) Less than the entire value of an interest in property

includible in the decedent’s gross estate is marital

deduction or charitable deduction property (e.g.,

char-itable remainder trusts); or

(iv) A partial disclaimer or partial qualified terminable

interest property (QTIP) election is made with respect

to a bequest, devise, or transfer of property includible

in the gross estate, part of which is marital deduction

or charitable deduction property

5. Person Who Files the Return The return is filed by an executor or

administrator who is appointed, qualified, and acting within theUnited States, within the meaning of § 2203 Reg § 20.2010-2T(a)(6)(i)

(a) No Executor Appointed If an executor has not been

appointed, a person in actual or constructive possession of

any property of the decedent (i.e., a non-appointed executor)

may file the estate tax return on behalf of the estate of thedecedent and elect portability Reg § 20.2010-2T(a)(6)(ii)

(b) Multiple Non-Appointed Executors A portability election

made by a non-appointed executor cannot be superseded by acontrary election made by another non-appointed executor ofthat same decedent’s estate (unless such other non-appointedexecutor is the successor of the non-appointed executor whomade the election) Reg § 20.2010-2T(a)(6)(ii)

(c) Surviving Spouse A surviving spouse who is not appointed

as the deceased spouse’s executor cannot file the return if anexecutor has been appointed

D. Serial Spouses.

If there are multiple marriages, only the most recent deceased spouse’s (i.e.,

the “last deceased spouse”) unused exemption can be used by the survivingspouse § 2010(c)(5)(B)(i), as amended

1. Only One Last Deceased Spouse Assume that the first spouse to

die died in 2010 with only $100,000 of assets which is devised to his

or her surviving spouse The DSUEA is $5,000,000.00, and thesurviving spouse’s exclusion increased to $10,000,000.00

2. Second Deceased Spouse Cancels First Deceased Spouse’s

DSUEA If the surviving spouse in the preceding example remarries

and the new spouse dies with a taxable estate in excess of

$5,000,000 in 2011, there will be no DSUEA Because the secondspouse is the last deceased spouse, the surviving spouse loses thebenefit of the first deceased spouse’s DSUEA, and his or herexemption is only $5,000,000 in 2010

3. A Second Spouse Who is Still Living is not the Last Deceased

Spouse The temporary regulations explain that the term “last

deceased spouse” is the most recently deceased individual who was

married to the surviving spouse at that individual’s death Reg

§ 20.2010-1T(d)(5) Merely remarrying does not eliminate theDSUEA acquired from a prior spouse unless and until the newspouse dies before the death of the surviving spouse

4. Application to Inter Vivos Gifts If a surviving spouse makes a

taxable gift, the surviving spouse’s last deceased spouse is identified

on the date of the taxable gift for purposes of determining a ing spouse’s applicable exclusion amount Reg § 25.2505-2T(a) Inother words, the gift tax availability of DSUEA acquired from thedeceased first spouse is not lost upon remarriage until the newspouse dies

surviv-(a) Ordering Rules If a surviving spouse makes a taxable gift,

the DSUEA from the decedent who is the last deceasedspouse of the surviving spouse is applied against the surviv-ing spouse’s taxable gifts before the surviving spouse’s basicexclusion amount is applied Reg § 25.2505-2T(b) In otherwords, the DSUEA available to a surviving spouse or to his orher estate for calculations on the returns includes both: (i) the

DSUEA from the surviving spouse’s last deceased spouse,

plus (ii) any DSUEA actually applied to taxable gifts pursuant

to the extent the DSUEA so applied was from a decedent who

no longer is the last deceased spouse Reg §§ 25.2505-2T(c)and 20.2010-3T(b)

spouse who remarries may want to make gifts that use theDSUEA before his or her new spouses dies

If the personal representative of the first spouse to die files an estate taxreturn and makes the election, the IRS may examine the gift and estate taxreturns of the predeceased spouse at any time to determine the DSUEAavailable for the surviving spouse § 2010(c)(5)(B), as amended byTRUIRA 2010 § 303(a); Reg §§ 20.2001-2T(a), 20.2010-2T(d), 20.2010-3T(d), and 25.2505-2T(e)

1. The examination cannot be made to assert a deficiency in estate or

gift taxes for the predeceased spouse beyond the normal statute of

limitations

2. The temporary regulations allow the decedent’s estate full

availabil-ity of the decedent’s applicable exclusion amount until the finalestate tax liability of the decedent is computed

3. The returns and return information of a deceased spouse may be

disclosed to the surviving spouse or the surviving spouse’s estate as

appropriate under section 6103 for purposes of an examination.

Reg § 20.2010-3T(d) The temporary regulations are silent as towhether the returns and return information can be obtained from the

IRS to use in preparing the surviving spouse’s returns.

4. It is critical that the decedent’s records be preserved and available to

the surviving spouse and his or her estate CAVEAT: The decision

of who will preserve the information as well as where and how it will be preserved is a major decision.

F. Traps for the Unwary.

Many personal representatives will assume that there is no need to file anestate tax return if the first spouse to die has a relatively small estate.However, the surviving spouse will lose the benefit of the deceasedspouse’s DSUEA unless the return is filed

1. Example Assume that the first spouse to die died in 2010 with only

$100,000 of assets which he or she devised to his or her survivingspouse The surviving spouse has $8,900,000 in assets

(a) If no estate tax return is filed for the first spouse to die, the

surviving spouse’s estate tax exclusion amount will only be

$5,000,000, and $1,400,000 in estate taxes will be owed(assuming the current 35% tax rate)

(b) If the estate tax return is filed, however, the surviving spouse

will have a $10,000,000 exclusion amount and there will be

no estate taxes

2. Example Assume a spouse is killed under terrible circumstances,

and the potential for a multimillion dollar wrongful death verdict ishigh If the personal representative sues for $10,000,000, he or she

may be advised that there is no need to file an estate tax returnbecause wrongful death proceeds in Alabama are exempt from bothincome tax and estate tax However, if all $10,000,000 is recoveredand paid to the surviving spouse, the surviving spouse at his or herdeath will have a $10,000,000 estate which otherwise would havebeen non-taxable had the personal representative of the pre-deceasedspouse’s estate filed an estate tax return and made the election.

3. Example Assume that the surviving spouse has a small net worth,

but he or she will inherit a substantial sum following the deaths ofhis or her parents The surviving spouse might find that he or sheneeds the DSUEA that was available when his or her spouse died

G. Continued Desirability of Credit Shelter Trusts.

Because of portability, many persons will assume that credit shelter trustsare no longer needed This may be a mistake

1. Example Assume a spouse with $10,000,000 of assets devises his

or her entire estate outright to his or her surviving spouse Because

of portability, the deceased spouse’s DSUEA will be available to thesurviving spouse, thereby resulting in a $10,000,000 applicablecredit amount for the surviving spouse If the surviving spouseremarries and the second spouse dies first, however, the $5,000,000DSUEA from the first spouse’s estate is lost

2. Example If, instead, the deceased spouse’s will left the first

$5,000,000 to a credit shelter trust and the surviving spouse ries, he or she can acquire the DSUEA of his or her second spouseshould their second spouse predeceased them and still exclude the

remar-$5,000,000 in the credit shelter trust in addition

3. Disclaimer Trusts If a couple hesitates to include credit shelter

trusts in their wills, it may be desirable to include disclaimer trusts

so the surviving spouse can change his or her decision when the firstspouse dies

Filing the return may be complicated when there is a second marriage, andthe husband and wife have children by prior marriages If the spouse withthe minimal assets dies first, his or her children will have little incentive, ifany, to incur the expense, time and difficulty of filing an estate tax Recog-

nizing that there is potential to save as much as $1,750,000 (i.e., DSUEA of

$5,000,000 time 35% tax rate), the children of the deceased spouse might

even demand that the surviving spouse share the potential benefit by acompensating payment to the estate of the first spouse to die

1. Deducting the Expense Will clauses can address whether the

deceased spouse’s estate or the surviving spouse will pay theexpense of preparing the return Because the deceased spouse’sestate necessarily will not owe estate tax, the expense cannot betaken as an estate tax deduction If it is paid by the deceasedspouse’s estate, it can be deducted on the estate’s income tax return

If it is paid by the surviving spouse, it is likely not deductible on anyreturn

2. Pre-Nuptial Agreements It might be advisable to enter into a

pre-nuptial agreement that requires the estate of the first spouse to die tofile an estate tax return and make the election upon the request of thesurviving spouse The surviving spouse might also want a provisionwhereby the surviving spouse can be named as the personal repre-sentative under these circumstances In return, the estate of the firstspouse to die may want to require the surviving spouse to pay allexpenses associated with the estate tax return and defend any taxaudit at his or her expense The following is sample language thatmight be used:

Deceased Spousal Unused Exclusion Amount.

Notwithstanding the foregoing, Mr Got-Nuthin agreesthat the personal representative of his estate will, atMiss Lottas-Money’s request, timely file any and alldocuments necessary to make the election provided in

§ 2010(c)(5) of the Internal Revenue Code of 1986, asamended by § 303(a) of the Tax Relief, Unemploy-ment Insurance Reauthorization, and Job Creation Act

of 2010, or any similar or corresponding law, for thedeceased spousal unused exclusion amount withrespect to Mr Got-Nuthin’s estate to be available to betaken into account by Miss Lottas-Money and herestate Said documents may include, but are notnecessarily limited to, an estate tax return for Mr Got-Nuthin’s estate even if his estate does not owe anyFederal estate tax at his death If Miss Lottas-Moneymakes said request and Mr Got-Nuthin’s estate wouldotherwise not be required to file an estate tax return or

other necessary documents in order to make the tion, Miss Lottas-Money shall make the arrangementsfor the preparation of said estate tax return (or neces-sary documents in connection with said election) andpay the cost of preparing said estate tax return or otherdocumentation and all other costs incurred in connec-tion with said election Mr Got-Nuthin’s personalrepresentative shall fully cooperate with the prepara-tion, execution and filing of the necessary documents(including said estate tax return) and shall promptlyfurnish all documents and information as shall bereasonably requested for that purpose.

elec-3. Will Provisions A low net worth spouse might want to consider a

clause similar to the following to assist the survivor A tion must be as to whether the cost will be paid by the low net worthspouse’s estate or by the surviving spouse

determina-Deceased Spousal Unused Exclusion Amount Election I direct that, upon the request of my surviv-

ing spouse, my executor shall do all things necessary

to make a valid election to allow my surviving spouse

to have the benefit of my deceased spousal unusedexclusion amount, to the greatest extent permitted

under applicable federal estate tax law [My surviving spouse shall have no obligation to make any payment

to my estate or to the other beneficiaries of my estate

in order for my executor to make or because my utor has made this election, nor shall any equitable adjustment be made with respect to the dispositions under my estate because my executor makes this elec- tion.] The cost of making this election, including the

exec-costs of filing any tax returns required to make this

election, shall be [charged solely against the residue of

my estate] or [paid by my surviving spouse].

4. Advising Personal Representatives Although it may seem obvious

in many estates that the personal representative will be unwilling tospend the money and endure the difficulty required to file an estate

tax return, it is desirable in all estates in which there is a surviving

spouse to die for the professional advising the personalrepresentative to discuss portability and have the personalrepresentative decline to prepare the return It is also advisable to

document the discussion Sample language to include in a letter forthis purpose can be as simple as the following:

Although the estate is below the $5,120,000.00 old for filing an estate tax return, we fully discussedthe effect of “portability” of _’s

thresh-$5,120,000.00 estate tax exemption amount If youfile an estate tax return, the unused portion of _’s exemption will be added to yourestate tax exemption amount Although this is a valu-able opportunity, you decided not to file an estate taxreturn and to forego the portability of the exemption

III. DISCLAIMER TRUSTS.

If there is uncertainty whether to use a marital formula will, the decision came bepostponed until the death of the first spouse to die The technique is to devise theresidue to the spouse, and then provide that any portion that is disclaimed isdevised to a credit shelter trust that benefits the spouse

The following is a typical disclaimer clause gift:

Gift to My Spouse I give, devise and bequeath the residue of

my estate to my spouse, outright and free of trust, if myspouse survives me

Effect of Qualified Disclaimer by My Spouse If my spouse

makes a qualified disclaimer of any part or all of the residue,the disclaimed property shall be transferred and paid over tothe Trustee of the Family Trust, the principal provisions ofwhich are set forth in Article _ hereof, to be held ordisposed of in accordance with the provisions thereof

B. Some Circumstances that Suggest the Use of Disclaimer

Trusts.

Circumstances where disclaimer trusts are frequently used include thefollowing:

1. Concern About Reduction in Applicable Exclusion Amount.

Husband and wife are in their seventies, and each has $2,000,000.They do not want to use a credit-shelter trust if the applicable exclu-sion amount remains at $5,000,000, but they are concerned that itmight be reduced to $3,500,000.00 or less

young professionals, and each has already accumulated $1,500,000.Although their combined net worth is only $3,000,000, they reason-ably anticipate that their net worth will continue to grow to exceedthe applicable exclusion amount by a substantial amount They donot want to limit themselves to portability as their only solution topossible estate taxes

3. Concern Due to Potential Inheritance Husband and wife have

moderate estates but anticipate inheriting significant amounts

are in their fifties, and their combined net worth is substantially inexcess of $10,000,000 If they live into their seventies or later, theybelieve they will rely on portability to use both applicable exclusionamounts However, if one dies in the near future, they recognize thatthe survivor is young enough that he or she is likely to remarry andlose the benefit of the deceased spouse unused exclusion amount

C. Pitfalls.

Pitfalls frequently encountered when using disclaimer techniques includethe following:

1. Diminished Mental Capacity By the time the first spouse dies, the

surviving spouse’s mental capacity might have diminished to thepoint that the ability to make a qualified disclaimer is questionable

2. Reluctance to Make Major Decisions The first year after a

spouse’s death is not a good time to make major decisions A fied disclaimer has to be made within nine months of death

Traditional trusts frequently instruct trustees to pay net income but retain pal The dividend yield in 1980 on the Standard & Poor’s 500 Index was almost

princi-6% Now, it is around 2% If a 1.25% trustee fee is subtracted, net income falls to0.75% before income taxes If the trustee invests in non-dividend paying stockslike Microsoft, the effect of the trustee fee creates negative net income even whenthe value of the trust grows substantially Many people feel that a steady return of4% or 5% coupled with a principal growth to compensate for inflation is a betterresult This led to the concept of “total return trusts” or “unitrusts.”

A. Total Return Trust Structure.

A typical total return trust provides that the trustee is to pay a unitrustamount of based upon a fixed percentage (typically between 3% to 5%) ofthe value of the trust each year instead of net income If the income plusgrowth in normal years is more than the unitrust amount, the beneficiarywill receive a reasonably steady return while principal grows to compensa-tion for inflation For example, if a $100,000 trust has income plus growth

of 6% per year, and the unitrust percentage is 4%, the adjustment for tion is illustrated as follows:

B. Additional Features and Considerations.

Matters to consider in addition to the unitrust percentage included thefollowing:

moving average value of trust assets instead of the current yearvalue For example, net asset value might be based upon a threeaverage

2. Personal Use Assets Personal use assets might be excluded from

the calculation of the value of the assets