1. Issues Involved in Planning for a Spouse, Including “Marital Deduction Formulas” Presented by: Lewis W. Dymond

2. Planning for a Spouse Outright. –No Protection. In Trust. –Creditor Protection. –Predator Protection. –Self Protection. –Estate Tax Protection.

3. Marital and Non-Marital Shares Why do we do it? –Fact-based reasons. Marital Share - provide for surviving spouse. Non-Marital Share - family planning purposes. –Estate tax and state death tax reasons. To maximize use of both spouses’ applicable credit amount (Unified Credit). Marital Share – qualify for marital deduction. Non-Marital Share – shelter applicable exclusion amount.

4. Marital and Non-Marital Shares

5. Review of the Options All to the Marital Share: –Generally non-taxable estate and not likely to be a taxable estate at death of survivor. –Desire to provide for the surviving spouse during his or her life and then to the residuary beneficiaries. –Tax planning can be available by designing the Marital Share as a QTIP (one lung QTIP). Include demand right after 6 months. Trust Protector can decant or grant a testamentary general power of appointment.

6. Review of the Options All to Marital Share, with any disclaimed amounts going to the Non-Marital Share: –A “wait and see” strategy. –May have a need to use the applicable credit amount coupon of first spouse to die. –Depends on surviving spouse disclaiming to fund the Non-Marital share (use the coupon). –Spouse cannot have a limited testamentary power of appointment in the Bypass Trust. –$.3M to $3M.

7. Review of the Options Stated percentage or fraction to Marital Share: –Not tax motivated; fact driven. –Use where you want the surviving spouse to have a stated percentage which will qualify for the marital deduction. –Balance will usually go directly to the residuary beneficiaries.

8. Review of the Options Clayton Election ($.5M - $7M): –A “wait and see” strategy. –Everything allocated to a QTIP; however anything elected out of QTIP treatment on a 706 allocated to the Non-Marital Share. –Not a disclaimer: May have a testamentary limited power of appointment. Spouse should not make the election on the 706.

9. Review of the Options Clayton Election (Caveat): If no 706 filed: All will be in the QTIP. QTIP will not be included in the surviving spouse’s estate. Trust Protector may decant or grant testamentary GPOA. Option to give spouse a demand right after 16 months.

10. Review of the Options Pecuniary Marital Formula: –A mandatory funding formula; must fund Non- Marital Share. –Solves for the smallest specific dollar amount to the Marital Share using date of death values that will reduce federal estate taxes to the lowest possible amount. –Option to allocate a minimum dollar amount to the Marital Share. –Option to adjust formula to reduce to lowest overall death taxes (federal estate and state death taxes).

11. Review of the Options Pecuniary Marital Formula: −Generally not recommended because funding of pecuniary amount accelerates recognition of IRD. −May want to use when you want to guarantee that the applicable credit amount of first spouse to die will be used (estates over $2M). −And there are likely to be no IRD assets. −Simplicity of calculating and funding.

12. Review of the Options Fractional Marital Formula: –A mandatory funding formula; must fund Non- Marital Share. –Solves for the smallest fractional amount to the Marital Share using date of death values that will reduce federal estate taxes to the lowest amount. Numerator = Amount of available exemption amount. Denominator = Date of death value of remaining property. No recognition of gain.

13. Review of Options Fractional Marital Formula: –Option to allocate a minimum fractional amount to the Marital Share. –Options to adjust formula to reduce to lowest overall death taxes (2 QTIPs). –Recommended when you want to guarantee that the applicable credit amount of first spouse to die will be used (estates over $2M).

14. Review of the Options Credit Shelter Pecuniary: –A mandatory funding formula; must fund Non- Marital Share. –Solves for the largest pecuniary amount to the Non-Marital Share, using date of death values, that can pass estate tax free. –Option to adjust formula to reduce to lowest overall death taxes.

15. Review of the Options Credit Shelter Pecuniary: –Best formula for very large estates (> $30M) where the pecuniary amount can be easily calculated and satisfied quickly with cash or easy to value assets. –Sufficient liquid assets to fund the applicable credit amount.

16. Review of the Options Statutory minimum to Marital Share: –Not tax motivated. –Allocates to the Marital Share only what the spouse would receive if he or she exercised his or her right to elect against the estate plan. –Must make sure that the distribution of the Marital Share qualifies for satisfaction of the spousal election.

17. Review of the Options Statutory minimum to Marital Share: –Normally, the Non-Marital Share would go straight to the residuary beneficiaries. –Use where there is a concern the spouse will exercise the spousal election.

18. Review of the Options None to the Marital Share, spouse is disinherited: –Not tax motivated. –There is no division into Marital and Non- Marital Share. –Option in WealthDocx to remove spouse from priority role.

19. Review of the Options None to the Marital Share, spouse is disinherited: –Spouse can be provided for by means of a specific pre-residuary distribution (e.g. SNT for spouse). –If disinheriting spouse, should have a pre- nuptial agreement. Otherwise use the statutory minimum to the marital share.

20. Planning the Marital Share Marital Share – qualifying for the Unlimited Marital Deduction: –Outright to the surviving spouse. –General Power of Appointment Trust. –QTIP Trust.

21. Planning the Marital Share Outright to the spouse. –Qualifies for the unlimited marital deduction. –Will be included in the surviving spouse’s estate; IRC §2033. –No lifetime protection. –Does not protect residuary beneficiaries.

22. Planning the Marital Share General Power of Appointment Trust: –All income distributed to spouse. –Discretionary distribution of principal by Trustee. –Spouse can demand all or any portion of principal at any time. –Spouse has an unlimited testamentary general power Included in surviving spouse’s estate; IRC §2041.

23. Planning the Marital Share General Power of Appointment Trust: –Limited, if any, creditor protection. –Perhaps some predator protection. –Limited, if any, self-protection. –Not a separate taxable entity from surviving spouse.

24. Planning the Marital Share QTIP Trust: –All income distributed to spouse and spouse must be sole beneficiary. –Spouse can demand property be invested for income. –Optional discretionary distribution of principal by Trustee. –Optional 5 and 5 power. –Optional limited testamentary power of appointment.

25. Planning the Marital Share QTIP Trust: –Optionally qualifies for unlimited marital deduction because spouse does not have a general power of appointment. –A separate taxable entity from surviving spouse. –Included in surviving spouse’s estate IRC §2044 only to the extend qualified for marital deduction.

26. Planning the Marital Share QTIP Trust: –Full trust protection, except for income. –Protection for residuary beneficiaries. –Option to give spouse demand right after 16 months. Converts to a general power of appointment trust. No longer a separate taxable entity. Loss of most creditor, predator and self protection. Loss of protection for residuary beneficiaries.

27. Planning the Non-Marital Share Non-Marital Share does not qualify for the Unlimited Marital Deduction Generally avoids estate tax on death of first spouse to die by being limited in amount to the deceased spouse’s applicable exclusion amount.

28. Planning the Non-Marital Share Distributed in a manner that will avoid estate tax on the death of the surviving spouse: –Bypass trust for the surviving spouse. –Skip spouse and go straight to the residuary beneficiaries.

29. Planning the Non-Marital Share Bypass Trust for the surviving spouse. –Does not have to qualify for unlimited marital deduction. –Must be designed inclusion in the surviving spouse’s estate; avoid § 2041 inclusion. –Spouse does not have to be sole beneficiary. Spouse only. Spouse and descendants. Spouse, descendants and named individual(s). Spouse and named individual(s).

30. Planning the Non-Marital Share Bypass Trust for the surviving spouse. –All income or discretionary income. –Optional discretionary principal. –Optional 5 and 5 power. –Optional lifetime limited power of appointment. –Optional testamentary limited power of appointment. –Provides full trust protection. –Protection for descendants.

31. Case Study #1 Tom and Cindy Client Ages 80 and 78 respectively. Married 60 years. 3 adult children: Peter, Paul and Mary; all responsible. Total estate $300,000 all owned jointly.

32. Case Study #1 Design for Tom and Cindy Client –Issues and considerations? –Type of revocable living trust? –Marital formula option? –Distribution of Marital Share? –Distribution of Non-Marital Share? –Distribution of residuary?

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38. Case Study #2 Tom and Cindy Client. Both age 50. Married 26 years. 3 children: Peter age 24, Paul age 20; Mary age 15. Total estate $500,000.

39. Case Study #2 Design for Tom and Cindy Client –Issues and considerations? –Type of revocable living trust? –Marital formula option? –Distribution of Marital Share? –Distribution of Non-Marital Share? –Distribution of residuary?

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47. Case Study #3 Tom and Cindy Client. Both age 50. Married 26 years. 3 children: Peter age 24, Paul age 20; Mary age 15. Total estate $1,500,000.

48. Case Study #3 Design for Tom and Cindy Client –Issues and considerations? –Type of revocable living trust? –Marital formula option? –Distribution of Marital Share? –Distribution of Non-Marital Share? –Distribution of residuary?

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56. Case Study #4 Tom and Cindy Client. Ages 60 and 58 respectively. Married 35 years. 3 children: Peter age 32, Paul age 30; Mary age 27. Total estate $8,000,000.

57. Case Study #4 Design for Tom and Cindy Client –Issues and considerations? –Type of revocable living trust? –Marital formula option? –Distribution of Marital Share? –Distribution of Non-Marital Share? –Distribution of residuary?

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65. Case Study #5 Tom and Cindy Client. Ages 60 and 38 respectively. Married 5 years. Tom has 3 children: Peter age 32, Paul age 30; Mary age 27. Cindy has 1 child: Sara age 15. Tom’s total estate $3,500,000. Cindy’s total estate $500,000.

66. Case Study #5 Design for Tom and Cindy Client –Issues and considerations? –Type of revocable living trust? –Marital formula option? –Distribution of Marital Share? –Distribution of Non-Marital Share? –Distribution of residuary?

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81. Case Study #6 Tom and Cindy Client. Ages 60 and 38 respectively. Married 5 years. Tom has 3 children: Peter age 32, Paul age 30; Mary age 27. Cindy has 1 child: Sara age 15. Tom’s total estate $60,000,000. Cindy’s total estate $3,000,000.

82. Case Study #6 Design for Tom and Cindy Client –Issues and considerations? –Type of revocable living trust? –Marital formula option? –Distribution of Marital Share? –Distribution of Non-Marital Share? –Distribution of residuary?

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