The New Super-Charged PAT (Power of Appointment Trust)
Wendy C. Gerzog
University of Baltimore - School of Law
May 4, 2011
Houston Law Review, Forthcoming
University of Baltimore School of Law Legal Studies Research Paper No. 2011-9
This article proposes to repeal the QTIP provisions in order to collect revenue now for transfers that are essentially transfers to third parties and not to the decedent's spouse. Because there are advantages of increased flexibility attendant to a QTIP as opposed to a PAT, this article proposes to take those repealed QTIP benefits and attach them to the PAT, which would greatly enhance that marital deduction trust form. A super-charged PAT would thereby be able to preserve the decedent's GST tax exemption (like a reverse QTIP), create a decedent's by-pass trust by allowing a PAT (or a partial PAT) "election-out," and create a decedent's state-only PAT marital deduction. The super-charged PAT would provide for much desired post-mortem tax planning without the complex and strict requirements of a disclaimer. Moreover, the new PAT would eliminate conflicts of interest and fiduciary problems inherent in the QTIP form of the marital deduction. Lastly, by repealing the QTIP provisions and by super-charging the PAT, the marital deduction would truly be a marital deduction and not a third party beneficiary tax deferral device.
I have criticized the QTIP trust on the basis that the QTIP provisions are both illogical and sexist. The QTIP provisions are illogical because they conflict with their stated public policy goal of taxing marital property when it leaves the marital unit and passes to other beneficiaries. Because the goal of the marital deduction is to tax property when it leaves the marital unit and because the QTIP expressly endorses passing the property to third parties at the first spouse’s death, the QTIP undermines the fundamental rationale for the marital deduction.
Likewise, the QTIP provisions are sexist. They treat women as the invisible spouse and they equate giving an income interest to women with giving them the corpus. With the QTIP, the first spouse to die controls the disposition of the corpus and he selects the decision maker who will make the QTIP election. The QTIP provisions implicitly equate giving an income interest to women with giving them the property itself because unlike the other exceptions to the terminable interest rule in which the widow is given a rough equivalent to outright ownership of the corpus, the QTIP provisions allow a marital deduction for the full value of the property at the husband's death even though the surviving spouse, the other half of the marital unit, receives only the income interest in that property.
A PAT provides the surviving spouse with both an income interest and a power to appoint the property to herself or to her estate; it is considered an equivalent to ownership although this article recommends that the PAT require that the surviving spouse be entitled to both an inter vivos and a testamentary power of appointment over the trust property. The PAT, however, has all but disappeared as a marital transfer because of the popularity of the QTIP. This article proposes to repeal the QTIP provisions but recognizes that repeal is virtually impossible because of certain well-liked features of the QTIP that have nothing to do with the decedent’s desire for dead hand control, but which provide advantages of increased flexibility in estate planning. Therefore, this article proposes to take those repealed QTIP “flexibility” benefits and attach them to the PAT to create a “super-charged” PAT to take the place of the QTIP trust.
Number of Pages in PDF File: 34
Keywords: QTIP, Power of Appointment Trust, Marital Deduction, estate tax, gift tax, estate planning, reverse QTIP, bypass trust, state-only QTIP
JEL Classification: H24, H29, K34
Date posted: May 7, 2011 ; Last revised: August 30, 2011