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51 Real Prop. Tr. & Est. L.J. 1 (2016-2017)

handle is hein.journals/rpptj51 and id is 1 raw text is: DUDE, WHERE'S MY INCOME? EXAMINING PROPERTY CONVERSION CLAUSES IN MARITAL TRUSTS Patrick J. Duffey* Author's Synopsis: The Marital Deduction matters. As an instrument of public policy, it is a powerful statement by Congress that spouses are a single taxable unit. As a planning tool it is a flexible technique, subject to no dollar limitation, with few technical restrictions, and with relatively simple practical application. For these reasons and others, it is widely used both during life and at death. In fact, there is no single deduction that is more significant. It is, simply, the foundation of an estate plan for the quintessential married couple. But there is a peculiar, technical, and inflexible requirement of the Marital Deduction that, though extraordinarily important, is often overlooked by planners who largely rely on form documents to provide the necessary boilerplate provisions required for modern trusts: spousal conversion of unproductive property. This required power, often effectuated by a trust provision (a Property Conversion Clause), operates to fulfill the substance behind the command found in the Treasury Regulations (Regulations) that trustees must distribute all income from trust property in order to qualify for the Marital Deduc- tion. When a trust holds a significant amount of unproductive property, that rule is rendered toothless without a power, exercisable by the spouse, to force the trustee to sell that property and purchase income- producing property in its place. The questions raised by the spousal conversion power are numerous. When, if ever, does underproductive property become unproductive for purposes of the Regulations? What timing require- ments are associated with the spouse's right of conversion? When will local law suffice to fulfill this requirement? What portion of trust assets must be unproductive in order to trigger application of the conversion requirement? What portion of trust assets must be unproductive in order to trigger application of a given Property Conversion Clause? May the trustee use alternate methods to make adequate distributions to the spouse while preserving otherwise desirable (or unmarketable) trust property? . Patrick J. Duffey, J.D., LL.M. (taxation), practices in the Tampa office of Holland & Knight, LLP. He concentrates his practice on estate planning, trust administration, and probate with a specific focus on structuring lifetime taxable transfers, representing fiduciaries in complex or contested administrative matters, and planning for owners of emerging enterprises.

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