fixing broken marital deduction and credit shelter trusts - ALI CLE

accepting of these techniques. This outline explores the different methods currently available formodifying and changing marital and credit shelter trusts. Necessarily, state law will impact theterms of the trusts and will need to be examined.I. Saving the Marital Deduction 3A. Restrict Boilerplate Powers1. When drafting a marital deduction trust, restrict the traditional boilerplatepowers given to the trustee to avoid the impairment of the maritaldeduction.2. In Revenue Ruling 69-56, 1969-1 C.B. 224, the IRS ruled that thefollowing fiduciary powers do not result in the disallowance or diminutionof the marital deduction if: (i) the governing instrument contains noprovision directing the fiduciary to favor the remainder beneficiaries overthe surviving spouse; (ii) the governing instrument does not preclude acourt of competent jurisdiction from imposing reasonable limitations uponthe exercise of the fiduciary powers in order to protect the survivingspouse’s interest; and (iii) the governing instrument does not evidence anintent to deprive the surviving spouse of the beneficial enjoyment of themarital trust property, as required by the Internal Revenue Code:a. To apportion or not to apportion, between successive beneficialinterests, interest income and expense, rental income and expense,real estate taxes, or other items of periodic income and expense.(Under applicable state law, the fiduciary’s determination must bemade so as to balance fairly the interests of successivebeneficiaries.)b. To treat ordinary cash dividends as income when received,regardless of the declaration date or record date.c. To treat extraordinary cash dividends as principal.(Donative Transfers) on Flawed by Unambiguous Testaments, 25 ACTEC Notes 299 (2000); John H. Langbein andLawrence W. Waggoner, Reformation of Wills on the Ground of Mistake: Change of Direction in American Law?,130 U. Pa. L. Rev. 521 (1982); Marilyn G. Ordover & Charles F. Gibbs, Correcting Mistakes in Wills and Trusts,N.Y. Law J. 3 (August 6, 1998); James L. Robertson, Essays: Myth and Reality – or, Is it “Perception and Taste”?– in the Reading of Donative Documents, 61 Fordham L. Rev. 1045 (1993); Barry F. Spivey, CompletedTransaction, Qualified Reformation and Bosch: When Does the IRS Care About State Law of Trust Reformation?,ACTEC Notes (Spring 2001).3 The author appreciatively acknowledges the contributions of Sebastian V. Grassi, Jr. in the writing of this sectionas significant portions of this section has previously appeared in the same or substantially similar form in SebastianV. Grassi, Jr., A Practical Guide To Drafting Marital Deduction Trusts (With Sample Forms and Checklists)(ALI/ABA, Philadelphia, PA (2008), http://www.ali-aba.org/aliaba/BK36 (800) 253-6397.- 2 -