Contemporary Tax Practice Research, Planning and Strategies Lecturer

ContemporaryTax Practice: Research, Planning and Strategies


ContemporaryTax Practice: Research, Planning and Strategies


Generally,a beneficiary’s preference would be to inherit property that is ofhigh basis so as to avoid tax as a result of the property’s valueappreciation up to the demise of the holder of the property, when itis eventually sold. The donor may have an option of selling theproperty during his lifetime, albeit at a loss, if its value hasdepreciated and experience income tax savings. In case of giftedproperty, the other option the basis of the donor (used to calculategains for the beneficiary) would project highly than a situationwhere the property maintained to death, where the basis wouldautomatically be the lower market value.


Hankand Wilma Allen are married taxpayers (both age 62) who desire toeventually transfer all of their property to their children afterthey die. Hank’s estate is currently worth $9,000,000, and Wilma’sestate is worth $6,000,000. What possible actions would you recommendfor Hank and Wilma to take during lifetime and at death to accomplishthis objective? Explain.


I.If the husband die first before his wife

Abypass trust is necessary for the implementation of a reduce-to-zeroformula. In this plan, a gift whose value equals the unified creditin value is directly transferred to the children, bypassing theestate of the surviving spouse. The remaining property would then betransferred and placed on a marital deduction trust. Sucharrangements are well known as “A-B trusts” and would beapplicable for Hank and Wilma’s wealth transfer. Trusts areobjectively developed to award the surviving spouse income interest,with the interest remaining in the marital deduction trust beingpassed under the terms of the trust to the children after the deathof the parents. The marital trust arrangement and bypass trustarrangement may go a long way collaboratively to attain thisobjective.

Nonetheless,a major drawback in this plan is the fact that the property will beexcluded from the estate of the surviving spouse since the income ofthe surviving spouse is categorized as being a terminable income. Dueto the possibility of this result, the property is required to beincluded in the first demised spouse’s property as per the codeotherwise, taxation laws would not catch up with both the estates.This tax evasion fete is only achievable when any terminable interestproperty is not subjected to a marital deduction. The same appliesfor a lifetime gift transfer the marital deduction becomes taxable.

Giftsmade to a spouse are considered to be tax neutral, due to the factthat there is availability of unlimited deduction for both estate andgift tax purposes. The unified transfer tax schedule is in such aprogressive form that married couples have the option to decreasetheir joint estate tax liability through the balancing the estatesize of each spouse. This move will insure that the spouse’s jointcredit is ultimately utilized. This objective may be achieved by theuse of the “Deceased Spouse Unused Exclusion Amount (DSUEA)”election.

II.If the wife die first before her husband

Theduo unified spouses’ credit amounts can be fully utilized in a lesscomplex and straightforward way by the DSUEA actions. Nonetheless,there is no simplistic way to go about this issue since there are anumber of factors that need to be considered: In instances where thebypass trust rule is employed, the trust assets value appreciationwill be non-taxable since the bypass assets of such a nature hadalready been enjoined in the estate of the first diseased spouse. Onthe contrary, on the direct passing of the assets to the DSUEAelection- owned spouse, any value increment will be an addition tothe second demised spouse’s estate. This appreciation may attract atax that may surpass the savings with the DSUEA election savings,more so in a scenario whereby the bypass trust assets are rapidlyexpected to increase in value. The implication of DSUEA election whenmade is the fact that almost all the assets being transferred to thebeneficiaries as a result of the second spouse’s demise and receiptof the step-up on FMV basis however this does not replicate in thecase of bypass assets making part of the first demised spouse.

Giventhat the surviving spouse in a bypass trust may be granted a generalpower of appointment to control the property under trust, the spousewho has survived has the authority to appoint any person of his/herliking including herself or himself, to the proceeds of the trust.Consequently, the property can be included in the estate of thesurviving spouse. Due to this later inclusion, the demise of thefirst spouse will have his/her estate will qualify for the maritaldeduction for the initial moneys transferred into the trust. Thisresult is also applicable in the case whereby a lifetime transfer ismade into the trust since the transfer would not be taxed on thebasis of marital deduction.

Thepower of appointment trust bears an exquisite disadvantage in theaspect of the spouse that is demised first does not possess theultimate control over the trust property distribution, since thegeneral appointment power lies with the surviving spouse. Thisscenario may only be rectified by the use of “qualified terminableinterest property (QTIP)”. This election is undertaken by theestate executor (or donor, where a lifetime transfers is applicable).

Forone to qualify for the election, the trust is obliged to provideincome to the surviving spouse for life, and secondly, the propertymay not be passed by any administrator or to any other individualsave for the surviving spouse so long as she/he is still alive. Giventhese two conditions are fulfilled, the initial transfer is qualifiedas a marital deduction, and the final disposition of the property isleft to the deceased spouse.


Giventhat every individual would like to postpone their tax burden, anarising question is how wise would a decision for an older spouse togift a majority of her or his property to a spouse who is younger inage so as to avoid estate tax incase the older spouse demises first?This may be logically astute to a certain extent, but only oncondition that the older spouse remains with enough property in hispossession to completely utilize his/her unified credit, which ifwasted, a potentially huge tax burden will befall the second spouse.

Duringthe funding of marital deduction, among the major crucial unknownvariables is the surviving spouse’s expected date of death.Undeniably, in the perspective of time value of money, it is alwaysbetter to pay as minimal a tax on the estate of the first to demiseamong the couple as possible. Way back, this idea would beexcegerrate by transferring everything to the surviving spouse (alsoknown as the “I love you” syndrome), which would waste theunified credit of the descendant. The potential disastrous effect ofsuch a provision has however been reduced by the “portabilityelection” option. The increase in the time lapse between two deathsof the couples reduces the potentially expected harm of poor maritaldeduction decisions.


Inthis situation, it does not matter who dies first between the wifeand the husband. Since they are of the same age, both the spouseshave equal probability of death. Therefore, the issue of avoidingestate tax incase the older spouse demises first is inapplicable.Also, there is no issue of the older spouse remaining with enoughproperty in his possession to completely utilize the unified credit,which if wasted a potentially huge tax burden will befall the secondspouse. This is due to the reason that the issue of age does notapply in this scenario. Therefore the tax effect in this instance isequal whether the property gifted to one spouse by the other, or isequally retained by both.


EverettJ.O, Hennig,C,Nichols, N (2013)ContemporaryTax Practice: Research, Planning and Strategies.Cch Incorporated.