## Facts

- The IRS issued administrative guidance addressing estate tax marital deduction treatment under I.R.C. § 2056 for certain marital formula clauses.
- The guidance focuses on wills or trusts that provide a pecuniary bequest (or pecuniary formula amount) to a surviving spouse.
- The governing instrument permits or requires the executor or trustee to satisfy the pecuniary bequest in kind.
- Assets used to fund the spouse’s pecuniary amount are valued at their values “as finally determined for Federal estate tax purposes.”
- The IRS identified uncertainty in many administrations about whether the spouse will actually receive the full economic value of the stated pecuniary amount when fiduciaries have discretion over asset selection and valuation mechanics.

## Issues

1. Under what conditions will the IRS allow a full estate tax marital deduction for a pecuniary bequest or transfer in trust to a surviving spouse when the fiduciary may satisfy the amount in kind at estate tax values?
2. When does fiduciary discretion or unclear state-law constraints make the marital deduction amount not sufficiently determinable, risking disallowance or reduction?

## Decision

- The IRS stated it will allow the marital deduction in the full amount of the pecuniary bequest or transfer if fiduciary duties, under state law or the governing instrument, clearly require funding that protects the spouse’s economic entitlement.
- Full deduction is allowed if the fiduciary must distribute assets (including cash) with aggregate fair market value at the date(s) of distribution at least equal to the pecuniary amount as finally determined for federal estate tax purposes.
- Full deduction is also allowed if the fiduciary must distribute assets (including cash) that are fairly representative of appreciation or depreciation in the property available to satisfy the pecuniary bequest or transfer.
- If it is not clear that fiduciary discretion is limited to satisfy one of these protective standards, the IRS indicated the marital deduction may be denied or reduced.

## Legal Principles

- A pecuniary marital bequest payable in kind at estate tax values qualifies for a full marital deduction only if the spouse’s receipt is sufficiently determinable and legally protected by enforceable fiduciary duties.
- Determinability is satisfied where the spouse is assured either:
  - assets with current aggregate fair market value not less than the pecuniary amount, or
  - a distribution that carries a fair representation of post-death appreciation or depreciation from the relevant funding pool.
- Where state law and the governing instrument do not clearly constrain fiduciary discretion to meet one of the approved funding standards, the marital deduction is not treated as fixed in amount and may be disallowed or reduced.

## Conclusion

Rev. Proc. 64-19 conditions full allowance of the estate tax marital deduction for pecuniary marital formula bequests funded in kind at estate tax values on clear, enforceable fiduciary duties that ensure either full-value funding at distribution or funding with assets reflecting a fair share of appreciation or depreciation; absent such constraints, the deduction is at risk.


Rev. Proc. 64-19, 1964-1 C.B. 682 (1964)