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Sunday, September 25, 2005

Waggoner on Rev. Proc. 2005-24 and the UPC Elective Share

Ssrn_46 WaggonerLawrence W. Waggoner (Michigan) has posted Rev. Proc. 2005-24 and the UPC Elective Share on SSRN.  Here is the abstract:

This article discusses Revenue Procedure 2005-24, which came as a bombshell to the estate-planning bar. The Rev. Proc. requires a spousal waiver of elective-share rights in order for a charitable remainder annuity trust (CRAT) or a charitable remainder unitrust (CRUT) created on or after June 28, 2005, to qualify for a charitable deduction. The elective share is a statutory provision common to most probate codes in non-community-property states that protect a decedent’s surviving spouse against disinheritance.

The Rev. Proc. is primarily though apparently not exclusively addressed to the elective share of the Uniform Probate Code (UPC). Unfortunately, the Rev. Proc. applies “applicable state law” that is sometimes consistent with and sometimes significantly departs from the UPC elective share, without identifying which is which. Consequently, the Rev. Proc. may give the wrong impression that the UPC served as the model for the applicable state law throughout the discussion and examples.

The source of the problem appears to be that the IRS misinterpreted the UPC elective share. The IRS’s description of the UPC elective share overlooks an important feature of that law: Under UPC elective-share law, the settlor-decedent’s surviving spouse has no claim on a “premarital CRAT or CRUT” — a CRAT or CRUT created when the settlor-decedent was unmarried or was married to a previous spouse. Consequently, no spousal waiver should be required of a later spouse if the UPC is the “applicable state law.” Yet, the Rev. Proc. repeatedly states that a waiver is required of a later spouse.

The article concludes by pointing out that there is a larger question posed by the Rev. Proc., which is that if the IRS remains determined to insist on a spousal waiver for CRATs and CRUTs that might but probably won’t turn out to be liable for a pro rata share of an electing surviving spouse, the result may be to weaken the elective-share protection for surviving spouses. The article urges the IRS to drop the requirement of a spousal waiver and work out some mechanism for retroactively denying the charitable deduction only in cases in which the surviving spouse actually claims his or her elective-share rights and the CRAT or CRUT becomes liable for satisfying a portion of those rights. This is in fact the IRS’s position regarding CRATs and CRUTs created before June 28, 2005, and would seem to be all that is necessary to protect tax revenues.

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