I. Estate Planning

A same-sex couple came to me for estate planning. They were legally married in Massachusetts, but of course the federal government does not recognize the marriage. One spouse had over $5 million in liquid investments and real estate, and the other had few significant assets at all. The wealthy spouse was about ten years older than the other, and had some health issues. The wealthy spouse also had children by a previous marriage.

The couple stated that they wanted to make sure the younger, less wealthy spouse was amply provided for during her lifetime. There were charitable inclinations, but both members of the couple got along well with the older spouse's children, and the couple wanted to make sure the children were well provided for. Moreover, since a good portion of the wealth came from the father of the children, the couple felt obligated to leave at least that portion to the children. A significant portion of the couple's income came from the wealthier spouse's liquid investments.

Normally, this would have been a perfect situation for an inter-vivos QTIP trust, except that of course there was no federal marital deduction available. I set up a charitable remainder unitrust with the wealthier spouse as donor and the less wealthy spouse as lifetime beneficiary, and funded it with an amount such that the resulting charitable deduction could all be used up in the next few years and none would be wasted. This generated a substantial income for the younger spouse, and the amount of the taxable gift was well within the wealthier spouse's lifetime exemption.

I also established an irrevocable incomplete gift trust with the wealthier spouse as grantor and the less wealthy spouse as lifetime beneficiary. The grantor spouse retained, inter alia, the right to appoint the principal and undistributed income remaining at her death among her descendants, who were also the remainder beneficiaries. This trust was funded with about two-thirds of the wealth that was earmarked for the children, and was not set up as a grantor-type trust for income tax purposes.

The following tax results flowed from this two-trust plan: since the spouses were unrelated for federal tax purposes, the lion's share of the transfer to the incomplete gift trust was not a taxable gift (a relatively small portion of the transfer was a complete gift, under the incomplete gift regulations), so the gift tax return, which reported the entire transaction, only showed a fraction of the transfer as a gift, and used up very little of the wealthier spouse's lifetime credit against gift taxes. This trust became a separate taxpayer, and, since it paid all its income to the less wealthy spouse, took a sizeable income tax deduction; the income was reported on the less wealthy spouse's income tax return (the spouses couldn't file jointly because their marriage was not recognized for federal tax purposes), whereas previously this income had been reported on the wealthier spouse's income tax return and had been taxed at her higher income tax rates. The wealthy spouse received a sizeable charitable deduction for the transfer to the CRUT, which we estimated it would take three years to use up. The CRUT was funded with marketable securities that had a significant built-in capital gain; these securities were sold after the transfer to the CRUT (the CRUT itself is not subject to income taxes), with the result that capital gains taxes were deferred until the gains themselves were passed out to the less wealthy spouse as a part of her unitrust interest (the less wealthy spouse received additional ordinary income and capital gains income from her unitrust distributions). The gift of the unitrust interest to the less wealthy spouse was significant, but still well within the wealthier spouse's lifetime credit. The CRUT will not be included in the taxable estate of either spouse. The incomplete gift trust will be included in the wealthier spouse's taxable estate, but not in the taxable estate of the less wealthy spouse. On the death of the less wealthy spouse (presumably later than the death of the wealthy spouse), the trust assets will pass to the wealthy spouse's children free of any transfer tax.

The two trusts will provide ample income to the less wealthy spouse for life. The wealthy spouse's estate plan also included a revocable trust with a substantial gift to charity at death, which would help offset the inclusion of the incomplete gift trust in her taxable estate. Even though tax savings was not among the goals that the couple articulated when they first consulted me, we were able to achieve their goals with good tax results as well.

II. Post-Mortem Estate Planning

A client died at age 70, and I discovered that he had not changed the beneficiary designations on his two IRAs to his wife, as I had advised; instead, the beneficiary designations both named his estate, which is not a qualified beneficiary under the IRS rules. One of the IRA contracts provided that, if no beneficiary were named, the surviving spouse was deemed the beneficiary; the other provided that, in this case, the estate was deemed beneficiary. I had the executor file a qualified disclaimer with respect to both IRAs. For the IRA that then defaulted to the estate, I had the decedent's three children disclaim as well. This meant that both IRAs were now payable to the surviving spouse—one because of the IRA contract itself and the other because of state law—and we were able to get both IRAs into the name of the surviving spouse, who then rolled them over, thus achieving significant income tax deferral.

III. Estate Administration

1. I was brought in to administer an estate where the husband had recently died, leaving his wife and two minor children. The family had recently moved to Massachusetts from out of state. The decedent's estate plan had been prepared by an attorney in that other state, and contained standard marital deduction planning: the decedent's assets passed into his revocable trust, which split into a family trust and a marital trust. It was a $3 million estate. The problem was that the surviving spouse was not a U.S. citizen, so no marital deduction was available. She was, however, a Canadian citizen, and the Canada–U.S. income tax treaty provides that if the surviving spouse is a Canadian citizen, an election can be made on the estate tax return to take twice the unified credit in lieu of the marital deduction. We made this election on the return. The out-of-state attorney, who was named as trustee, declined to serve when we threatened to sue him for failing to inquire as to the citizenship of the surviving spouse, and in fact became—grudgingly quite helpful. The IRS initially assessed a large tax deficiency, but once I faxed the Canada–U.S. income tax treaty to the local IRS examiner, they removed the deficiency and issued the closing letter.

2. The executor of a $12 million estate was not satisfied with the attorney he had hired and consulted me. The decedent had made gifts totaling $825,000 to Section 529 plans for the benefit of his fifteen grandchildren a month before he died. The prior attorney's office had elected on the gift tax return to treat these gifts as having been made ratably over five years, under the provisions of Section 529, in order to use up five years' worth of annual exclusions. But since the donor was already dead when the return was filed, it was clear that only one year's worth of annual exclusions could be removed from the taxable estate. I saw that a better result could be obtained by electing to treat the entire $825,000 as a taxable gift made in the year of death. For federal purposes, the amount included in the estate was the same, since one year's worth of annual exclusions applied to the $825,000 in any event. For state purposes, however, treating the entire $825,000 as a taxable gift made in the year of death removed it entirely from the Massachusetts taxable estate.

My office filed an amended federal gift tax return, an amended federal estate tax return, and an amended Massachusetts estate tax return, all to reflect the different treatment of the gifts to the §529 plans for the grandchildren. We received a refund in the range of $100,000 from the Commonwealth. Meanwhile, the first attorney for the estate insisted that he had made all the proper elections-but when presented with the refund check from the Massachusetts Department of Revenue, he did reimburse the estate for his fees.