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Game of Thrones:

JOUSTING for Power in the Family Enterprises

MODERATOR:
Caroline Abela,
WeirFoulds LLP

PANELLISTS:

Agns Proton,
Cabinet PROTON

Kelly A. Charlebois,
Miller Thomson LLP

Thomas Rohner,
Pestalozzi

Carmina Y. DAversa,
Attorney at Law

American Bar Association


Section of
International Law
FALL MEETING
Montreal, Canada
October 20-24, 2015

ADVISORS ROUNDTABLE on the Planning and


Litigation of Closely Held Corporations
Robert Baratheon is the King of the Seven Kingdoms and Ruler of the Iron Throne.
Roberts wife, and the Queen of the Seven Kingdoms, is Cersei Baratheon (formerly
Cersei Lannister). Together, Robert and Cersei have three children: Joffrey, Myrcella
and Tommen. However, unbeknownst to Robert, the father of these children is another
man. Robert himself has also frequently engaged in adultery, producing an illegitimate
child of his own named Gendry with the maid.
Robert and Cerseis marriage is a loveless one and neither is particularly fond of the
other. Behind the scenes, Cerseis father (Tywin Lannister) and brothers (Jaime and
Tyrion Lannister) are jockeying for influence and power. Robert and Cerseis eldest son
Joffrey is power-hungry and desperately wants to become king.
Surrounded by individuals plotting his demise, Robert has enlisted Ned Stark as hand
of the king. As hand of the king, Ned is appointed as a director of the Seven Kingdoms.
Ned is the man whom Robert trusts most and Robert has brought him into the seven
kingdoms as a business partner and minority shareholder. As hand of the king, Ned has
also been appointed as executor and trustee of Roberts estate.
CAROLINE ABELA: Once Robert dies, who among his family members will be his
heirs? Please tell us how your jurisdiction will deal with Roberts empire.
Kelly Charlebois: In Ontario (and Canada generally) the succession of a deceaseds
estate is dependent upon whether he or she dies testate or intestate. If the deceased
dies leaving a valid will, the provisions of the will determine who has authority to
administer the estate, and to whom the deceaseds property shall be distributed. In the
case of an intestacy, the manner of distribution of the deceaseds estate is prescribed
by statute. In Ontario, the Succession Law Reform Act specifies the order of succession
of a deceaseds estate to his or her next-of-kin. A married spouse and the children of
the deceased share the deceaseds estate subject to the wifes preferential share. In
the absence of a wife and/or children, the estate is distributed in the order set forth in
the Act.

In addition to the right to direct the distribution of assets on death in a will, an individual can provide for the transfer of
certain property on death by way of beneficiary designation. A beneficiary designation is a written direction specifying
the person to whom the property should pass on death and has the effect of transferring the property outside of the
estate. Beneficiary designations are commonly made in respect of life insurance proceeds, registered retirement
plans, and pension plans.
Even if a deceased has left a valid will, his or her testamentary intentions may be frustrated by the rights of dependants
who have an entitlement to claim support from the Estate. These claims are founded on statutory rights which
effectively operate as a first charge on the Estate. While a dependants relief claim would appear to suggest that an
individual must demonstrate some degree of financial dependence on the deceased prior to death, moral claims
have been advanced, and given recognition, in some jurisdictions in Canada. It is only once the dependants relief
claims have been satisfied that the balance of the Estate can be distributed.
Thomas Rohner: As a preliminary remark, in potentially international cases, one would from a Swiss law
perspective first look at the conflict-of-law rules provided by the Swiss Federal Act on Private International Law of
December 18, 1987, to determine the applicable law. However, the following considerations are limited to Swiss
domestic law and without taking into account any conflict-of-law rules. Moreover, when it comes to the division of
King Roberts estate, one would, as a first step, need to determine the scope and the property of the estate. In
particular, in the event Robert dies while being married to Cersei, Roberts estate would be determined by taking into
account the rules of marital property first. Only afterwards, as a second step, the rules provided by Swiss inheritance
law would be applied to King Roberts estate.
Swiss inheritance law, which is regulated in the Swiss Federal Civil Code of December 10, 1907 (CC), generally
sets forth who the heirs are and to which extent they inherit. The Swiss statutory order of inheritance provides specific
rules in art. 470 CC to determine the division of an estate. The closest relatives of the testator are so-called statutory
heirs (art. 457 et seqq. CC) and protected by compulsory portions and quotas (so-called Pflichtteil; art. 471 CC),
which cannot be amended by the testator (e.g. in a will, art. 470(1) CC). Under the compulsory portions right, the
testator has a reduced quota of his estate, which he can freely dispose of and make other arrangements (if he so
wishes; art. 481 CC).
King Robert Baratheons wife, Cersei, and the three children, Joffrey, Tommen and Myrcella, are statutory heirs of the
late Roberts estate (as Robert is legally deemed to be the father of the three kids, although he is not the biological
father; art. 255 CC).
Gendry, who is an unacknowledged son of Robert, is not statutory heir to Robert, so long as he is not officially
recognized by Robert or by authorities by means of a court proceeding (art. 261 CC). If King Robert were to die before
he could officially recognize Gendry as his legitimate son, Gendry could nevertheless bring an action to establish
the existence of the parentchild relationship between him and Robert. Such a claim is brought (in order of priority)
against the legitimate children, the parents or siblings of the testator (art. 261(2) CC). Hence, in case Robert dies
without officially recognizing Gendry, Gendry would need to bring action against Joffrey, Tommen and Myrcella as the
legitimate children of Robert. If Gendry would be acknowledged by Robert as his legitimate son, or if Gendrys claim
against Joffrey, Tommen and Myrcella would be successful, Gendry would be considered as statutory heir and his
inheritance would be protected under the compulsory portions right.
Agns Proton: One of the main characteristics of a Civil Law jurisdiction is the institution of forced heirship
within its succession domestic law. This is thus the case in France as it is in Switzerland.
If Robert were to die being domiciled in France instead of in Kings Landing, without leaving a will, his statutory heirs
would be his wife and his legitimate/recognized children (art. 734 & 757 CC combined).
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Like in Switzerland, first the liquidation of the matrimonial regime must be done in order to determine the nature and
the content of the succession estate.
After that mandatory prerequisite, Roberts Estate would then be distributed as follows:
Cersei, being the surviving spouse, could elect either a right of usufruct over the entire estate, or in full
ownership; however, if Gendry were to eventually enter the succession, there would be no choice, she would
merely get of the estate (art. 757 CC). In France the surviving spouse also gets a lifelong right of residence
in the family dwelling (764 CC). I would say that under that provision she could stay in Red Keep and live in
the royal apartments in Maegors Holdfast, using all included furniture, heirlooms, etc. She could also claim for
alimony against the Estate (art. 767 CC), namely, against the other statutory heirs since in France the Estate is
not a legal entity;
Joffrey, Myrcella and Tommen would then get the remainder, in undivided equal shares (art. 734 & 735 CC), that
is, again, if Gendry is not to be considered.
Since August 17th 2015, due to the implementation of the new EU regulation in International Successions (N
650/2012), this devolution governs all assets, no matter where they are located. Now, if King Robert executed a
(valid) Will, which he most likely did, he certainly would have cut Cersei out of his Estate, since their marriage was a
failure.
He can do so under French law.What he cannot do (of course) is deprive Joffrey, Myrcella and Tommen of their
compulsory share; here 1/4th each. This means that the (free) disposable portion of his Estate is (only) a remaining
1/4th.
But of course, there is a possibility that Gendry will claim a right of inheritance as well, but for this he will have to
prove his filiation first. Obviously, to that end, he cannot come forward with a birth certificate, or with Roberts official
recognition of fatherhood. However, Gendry could judicially establish his filiation by bringing a suit against Roberts
heirs, be they statutory and/or testamentary.
To be successful, he has to prove his possession dtat denfant: he must show that he was considered and treated
by Robert as his son (art. 310-1, 310-3, 317, 327, 328, 330 CC). This is the parent-child relationship to which
Thomas is referring above, when mentioning Switzerlands comparable court proceeding. The fact that Gendry was
born out of adultery is of no consequence here. When established, filiation triggers the exact same rights, whether
the child is legitimate or not.
The Estate would then be partitioned as such (art. 913 CC):
The disposable portion when there are 3 children and more: 1/4th
The compulsory portion when there are 3 children and more: 3/4th
The 3/4th of the Estate would devolve to 4 children this time, again in undivided and equal shares. If there are not
enough assets left to fulfill Gendry with his forced heirship share, he will be entitled to ask for financial compensation
to third parties and/or siblings to whom assets were wrongly devolved/bequeathed. It is what Thomas calls action in
abatement under Swiss succession law, which we call in French action en rduction.
Lastly, there is no problem with King Robert appointing Ned Stark as his testamentary executor in a French will; since
2006 the executors powers have been enlarged and are now governed under art. 1025 1034 CC.

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Carmina DAversa: In the United States, state law controls intestate succession. For example, in Pennsylvania,
because Robert would be survived by a child unrelated to Cersei, Cerseis intestate share is limited to one-half of
Roberts intestate estate. Whether Joffrey, Myrcella, Tommen and/or Gendry, as children born out of wedlock, are
entitled to the other half generally is dependent upon (1) whether during the lifetime of the child, Robert openly holds
the child to be his and receives the child into his home or provides support for the child, or (2) clear and convincing
evidence exists that Robert is the biological father of the child.
Robert can alter or affect intestate succession by execution of a Will, agreement, (e.g., marital agreements, business
agreements, trust agreements), beneficiary designation and/or deed. Nonetheless, Cersei, as the surviving spouse
may elect to take one third of statutorily identified property (e.g., property conveyed by the decedent within one year of
death exceeding $3,000 per donee), but must disclaim or release other statutorily identified property (e.g., proceeds
of insurance on decedents life attributable to premiums paid by the decedent, his employer, partner or creditor).
Finally, although most states, including Pennsylvania, are not community property jurisdictions, community property
may retain its character in a non-community property jurisdiction. Assuming Roberts estate includes community
property, Robert has additional limitations in passing property to someone other than his spouse.

CAROLINE: Would you advise Robert to undergo an estate freeze? How would the use of a holding company
or the creation of different classes of shares reduce the tax implications for his children upon succession?
Thomas: In Switzerland, inheritance and gift taxes are levied at cantonal level and each of the 26 cantons has its
own inheritance tax legislation. An attempt to federalize Switzerlands inheritance tax system has been declined in a
popular vote just recently. Since the effective tax burden varies among the cantons, sometimes considerably, taxes
may be mitigated by changing the place of residence to a more attractive location. In particular, with a few exceptions,
cantons typically exempt children and close relatives from inheritance taxes. As a general rule under Swiss domestic
tax law, the last place of residence of the testator determines the place where inheritance taxes are levied (expect
for real estate).
Hence, King Robert could by choosing his place of residence opt into a specific inheritance tax regime that would
then apply to his heirs (with the exception of real estate).
Agns: Unless international tax treaties provide otherwise as to assets located abroad, taxes are owed and paid
in France. They would be calculated on all assets devolved according to French Law (art. 750 ter CGI) For the time
being the surviving spouse is not taxable, so no matter what Cersei gets, it would be free of charge for her from that
perspective. As for the children, however, estate planning should be done during Roberts life to alleviate the burden
of taxation, which could amount to up to 45% (when the value of the Estate > 1 805 677 )!
However, there are efficient schemes and vehicles to be implemented here, including donations inter vivos combined
with separating usufruct from naked property as to the donated assets/company shares. This would be left to King
Roberts estate planner (French) advisors to handle.
Carmina: If the estate of Robert is subject to United States federal transfer taxation, it may be advisable for
Robert to consider various estate tax planning tools to minimize tax consequences during his lifetime and at his
death. Post-mortem recapitalization of the company, resulting in voting and nonvoting stock, may allow Robert to
ensure the company, after his death, is controlled by Ned and other engaged managers and employees instead of
uninvolved family members.
Assuming Robert has no other assets to transfer to Cersei or the company is unable or unwilling to engage in a
stock purchase with Cersei, the recapitalization also may allow Roberts estate to secure a federal estate tax benefit,
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namely, a marital deduction, without Cersei having direct control of the company. Because of the restrictions of
section 2701 of the Internal Revenue Code, recapitalization, during Roberts lifetime, and subsequent inter vivos
transfers of the stock may not be tax efficient. Section 2701, however, does not preclude application of minority
discounts to the value of inter vivos gifts of stock.
CAROLINE: Myrcella does not really care about the Seven Kingdoms. Can she disclaim the inheritance or
promise to do so?
Thomas: Yes, indeed, this is admissible under Swiss inheritance law. Pursuant to art. 566 CC, both the statutory
and named heirs are entitled to disclaim an inheritance passing to them. In particular, if at the time of his death the
deceased had been officially declared insolvent, art. 566(2) stipulates that there is a presumption of a disclaimer.
The statutory time limit to perform such a disclaimer is three months (art. 567 CC).
However, Myrcella needs to be careful in dealings concerning the estate before she makes such declaration of
disclaimer. According to art. 571 CC, an heir is no longer entitled to disclaim the inheritance where an heir has
interfered in the affairs of the estate before expiry of the time limit. Moreover, if the heir has acted in a manner
not conducive to administering the estate or maintaining the deceaseds business activities, or where she has
appropriated or concealed objects belonging to the estate, then she may have forfeited her right to disclaim the
inheritance (art. 571(2) CC).
Moreover, pursuant to art. 495 CC, an heir may renounce to the inheritance prior to the testators death. The heir
needs to conclude an inheritance renunciation contract with the testator, which can provide, but not necessarily
needs to provide valuable consideration. As a consequence, the renouncing heir is no longer deemed to be an heir
on the succession (art. 495(2) CC).
Agns: Yes, of course she may disclaim the inheritance (art. 768 CC). But she cannot do it partially: disclaiming
is an all or nothing option (art. 769 CC).
She cannot disclaim it before Roberts death though (art. 770 CC). What she can do is waive her rights to claim for
damages if and when deprived of her forced heirship share after Robert dies (art. 929 till 930-5 CC).
Like in Switzerland, she must be careful not to act upon her heirs quality, or she could be deemed as having implicitly
accepted the Estate (art. 782 CC).
Carmina: Assuming Myrcella is an heir of Roberts estate, Myrcella may disclaim her inheritance in full or in part
under Pennsylvania law. A disclaimer also may be used to achieve certain federal transfer tax objectives. State and
federal requirements, however, may differ and require strict adherence. One significant bar to a qualified disclaimer
under federal law is the failure to meet the nine-month deadline under section 2518(b)(2) of the Internal Revenue
Code. Instead of relying on Myrcella to meet state and/or federal requirements, Robert may want to disinherit
Myrcella expressly by Will or employ other methods (i.e., buy-sell agreement) to ensure that Myrcella does not inherit
the Seven Kingdoms. Another option may be partial disinheritance of Myrcella by limiting her inheritance to assets
(e.g., life insurance) other than the Seven Kingdoms.

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CAROLINE: Myrcella wants to marry someone from the House of Martell an enemy of the Kingdom.
Robert does not want her to marry the enemy. He disinherits Myrcella based on her marrying someone of
another race. Does she have any options to gain her wealth back before or after her father dies?
Kelly: In Canada, testamentary freedom is not absolute. In other words, there are limits on an individuals right
to dispose of his or her estate as he or she wishes. Public policy considerations can operate to interfere with the
manner in which a deceaseds estate is distributed. The support obligations which take precedence over a testators
intentions have been discussed above. Courts have also taken into account other public policy considerations in
setting aside provisions in a will which are determined to be contrary to recognized human rights on the basis that
there are unacceptably discriminatory and contrary to public policy.
Historically, these public policy grounds operated to prevent offending provisions in a will from being enforced. In
other words, if the will contained an explicit statement which was found to be contrary to public policy, a court could
intervene to find the provision void and decline to enforce it. More recently, in Ontario, the court has taken this
approach a step further in declining to enforce the provisions of a will where external evidence suggested that the
testators reason for disinheriting a daughter was a direct result of her having had a mixed-race child. Even though
there was no provision on the face of the will which offended public policy, the court went behind the terms of the will
to scrutinize evidence of the testators intention. The court concluded that the testator was motivated by a racist
principle which not only offended human sensibilities but also public policy. The entire will was set aside. (Spence
v. BMO Trust Company, 2015 ONSC 615).
While the Spence case is currently under appeal, this line and level of inquiry into a testators motivations could open
the door to increased will challenge litigation on public policy grounds, even where the issue is not evident on the
face of the will.
Thomas: Under Swiss inheritance law, disinheritance is admissible in two circumstances only (art. 477 CC):
if the heir has committed a serious crime against the testator or a person close to him; or
if the heir has seriously breached her duties under family law towards the testator or the latters dependants.
Myrcella marrying someone from the House of Martell hardly qualifies as a serious crime against the testator
from a Swiss law perspective and thus, King Roberts testamentary disposition to deprive Myrcella of her statutory
entitlement would be subject to an action in abatement according to art 522 CC. However, even if Myrcellas action
in abatement would be successful, her inheritance would be limited to her compulsory portion and quota (art. 522(1)
CC).
Agns: Like in Switzerland, children must have committed heavy crimes or very serious breaches of familial duties
to be legally stripped of their compulsory inheritance rights (art. 726 729-1 CC).
There is no way that such a discriminatory provision relating to Myrcellas wedding could be upheld in France. No
condition precedent can be imposed that would restrain constitutionally, statutorily and judicially recognized human
rights. It would be contrary to public policy (and this is the same solution in all four jurisdictions here, which is good).
Such illegal provision is deemed unwritten and thus automatically void.
Carmina: For planning purposes, a testamentary gift conditioned upon restraint on marriage may be unenforceable
in Pennsylvania as against the states public policy.

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ABOUT THE ADVISORS


Caroline Abela is a partner with WeirFoulds LLP and has been involved in leading business litigation and estate litigation cases.
Focusing on commercial and corporate litigation and estates, trusts and capacity litigation, Caroline represents clients ranging
from large corporations and institutions to small business owners and professionals. Caroline has appeared as counsel before
all levels of courts in Ontario and the Federal Court of Canada.
In 2013, Caroline was recognized as one of Canadas Lexpert Rising Stars: Leading Lawyers Under 40. She was also selected
as a Litigation Lawyer to Watch in Lexperts 2014 US/Canada Cross-border Litigation Guide.
As the former National Representative (Canada) for the International Association for Young Lawyers and a member of the current
OBA Executive, Estates and Trusts Section, Caroline is actively involved in the legal community.
Agns Proton started her own practice in Cannes in 1995, as the founding member of Cabinet PROTON. Her primary areas
of expertise, targeted to International Private Clients, are litigation in inheritance and estate law, as well as litigation in civil and
commercial contracts.
She is a member of several international lawyers associations (ABA SIL and RPTE sections, UIA, AEA-EAL). She has been appointed AIJAs Honorary General Secretary (2009), and prior to joining the AIJAs Board she chaired AIJAs International Private
Client Commission (2005-2007). Within ABA-SIL, she currently co-chairs the International Private Client Committee, and she is
also Vice-Chair of the Real Estate Cross Border Practice Committee.
As well, she has been elected to the Cannes City Council (2001-2014), where she was in charge of International Affairs. She is
also an active member of PWN GLOBAL (Professional Women Network section of Nice Cte dAzur) since 2012.
Kelly A. Charlebois is an experienced commercial, estates and trusts litigator and practical problem solver at the Toronto office
of Miller Thomson LLP. She persuasively and effectively advances her clients interests and achieves positive and cost effective
results for them in a broad range of areas. Kellys clients praise her strategic approach in handling their files.
Kelly has particular expertise in matters relating to, among others, estates, trusts and capacity-related proceedings. Kelly has
successfully represented both individuals and organizations in this area including in will challenges, will interpretations, guardianship applications, dependant support applications, passing of account applications, and proceedings involving breach of trust
and breach of fiduciary duty. She also acts regularly for financial institutions in providing advice relating to estates, powers of
attorney and capacity issues.
Drawing on her strong commercial litigation background, which has provided her with extensive advocacy experience at all court
levels, Kelly is well-positioned to represent her clients in the most complex of estate disputes.
Thomas Rohner is a partner and member of Pestalozzis Litigation and Arbitration as well as Private Client groups in Zurich.
He has represented corporations and individuals in numerous complex litigation and arbitration matters, both national and international, involving various industries such as banking, pharmaceuticals, insurance, IT, telecommunications, energy, health,
commodities, and construction.
Thomas regularly sits as an arbitrator in proceedings under various rules. He also has a wide range of experience in inheritance
and trust disputes and advises clients on succession and estate law. He also represents clients in international judicial assistance
proceedings. Further, he is active in insolvency disputes and enforcement and asset tracing/freezing proceedings.
From 1997 until 2005, he served as a part-time judge at a District Court. In addition, he was a temporary vice-president of this
Court on a full-time basis in 2001. Prior to joining Pestalozzi in 2002, Thomas Rohner worked as an international associate for
Steptoe & Johnson LLP in Washington, DC.
Carmina Y. DAversa is formerly of the International Group of the Internal Revenue Service Estate and Gift Tax Program. A full
member of the international organization Society of Trust and Estate Practitioners (STEP), Carmina concentrates her law practice
in international and domestic tax planning and compliance.

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Have your cake and eat it too? The availability of the marital deduction or
credit for the estate of a closely held business owner with Canadian
connections
Carmina Y. DAversa

INTRODUCTION
Given the close geographical proximity between Canada and the United States, it is to be
expected that Canadian residents and United States residents establish and/or engage in business
in each others country. In addition, it is not surprising that a closely held business owner or coowner may want to ensure post-death continuation of the business with engaged managers and
without unnecessary reduction of value by taxes related to death. This article reviews and
evaluates postmortem options for an estate of a Canadian resident who also is a United States
citizen and owner of a closely held business established and operating in the United States and
survived by a Canadian citizen and resident spouse.
UNITED STATES FEDERAL ESTATE TAXATION OF US CITIZEN UNDER THE
INTERNAL REVENUE CODE
The value of the worldwide gross estate of a United States citizen (whether residing in or outside
the United States at time of death), less allowable deductions, is subject to United States federal
estate taxation.1 The marital deduction2 is allowed for the value of property passing to a
surviving spouse if the requirements of Internal Revenue Code sections 2056 and/or 2056A are
met. In computing any federal estate tax due, the Code also allows for reduction of the tentative
tax by use of an applicable credit amount or unified credit3 equal to the federal estate tax
imposed on a basic exclusion amount, indexed for inflation.4 For estates of decedents dying in
calendar year 2014, the basic exclusion amount is $5,430,000 (i.e., $5,000,000 indexed for
inflation),5 and the unified credit is $2,117,800.6 The maximum estate tax rate is 40%.7
MARITAL DEDUCTION UNDER THE INTERNAL REVENUE CODE
Terminable interest rule
Generally, the Code disallows a marital deduction for the transfer of a terminable interest in
property to ensure that the property interest passing to the surviving spouse, if retained until his
or her death, will be subject to federal estate taxation.8 A terminable interest is an interest
which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of
some contingency.9 An example of a terminable interest in property is a life estate.10 One
exception to the terminal interest rule is qualified terminable interest property (QTIP) under
section 2056(b)(7). Property included in the decedents gross estate is QTIP if the following
requirements are met:
1. The property passes from the decedent.
2. The surviving spouse has a qualifying income interest for life.
3. The executor11 of the estate timely and properly makes an irrevocable QTIP election on
the United States federal estate tax return.12
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A qualifying income interest for life requirement has the following two components:
1. [T]he surviving spouse is entitled to all the income from the property, payable annually
or at more frequent intervals, or has a usufruct interest for life in the property, and
2. [N]o person has a power to appoint any part of the property to any person other than the
surviving spouse during the spouses lifetime.13
In Estate of Rinaldi v. United States,14 the United States Court of Federal Claims disallowed the
marital deduction because trust terms ran afoul of the second component of the qualifying
income interest requirement. Per recited facts, the decedent, the company director, owned 52.06
percent of closely held company stock at the execution of his will and at his death. The
decedents Will provided for the stock to pass to a trust if the decedents wife failed to survive
his son (the companys chief executive officer). In accordance with the first component of the
qualifying income interest requirement, the trust terms provided for net income payable to the
surviving spouse at least annually and included a prohibition against holding unproductive
property without the surviving spouses consent.15 Additional trust terms, however, prohibited
the stock from being sold without the sons consent and, if the son no longer managed the
company on a day-to-day basis, the trust fiduciary (i.e., the son) could offer to sell the trusts
stock to the son at book value, a value determined to be below fair market value.16 Agreeing with
the Internal Revenue Service, the court found that the potential sale of assets at a bargain price to
someone other than the surviving spouse effectively diminished the value of the corpus and,
therefore, was an impermissible power of appointment of the stock to a person other than the
surviving spouse during her lifetime.
United States citizen requirement
The Code also disallows the marital deduction if the surviving spouse is not a citizen of the
United States (whether or not residing in the United States).17 If the surviving spouse is not a
United States citizen, the Code provides an exception under section 2056A, allowing a marital
deduction if the interspousal transfer occurs through the use of qualified domestic trust
(QDOT).18 For a trust to qualify as a QDOT under section 2056A, the trust document must
meet certain requirements that in effect ensure the collection of tax imposed by section
2056A(b).19 In addition, the executor is required to make timely an irrevocable QDOT election
on the federal estate tax return.20
MARITAL CREDIT UNDER THE UNITED STATES-CANADA PROTOCOL
In its negotiations of bilateral tax treaties, the United States typically requires a savings clause to
ensure the negotiated treaty does not affect the United States ability to tax its current and former
United States citizens. The savings clause that is part of the Convention Between the United
States and Canada with Respect to Taxes on Income and on Capital signed at Washington on
September 26, 1980, as amended by protocols signed on June 14, 1983, March 28, 1984, March
17, 1995, July 29, 1997 and September 21, 2007 (hereinafter Convention), however, contains
exceptions.21 One exception is the application of the marital credit to United States citizens.22
Article XXIX B (Taxes Imposed by Reason of Death), introduced in article 19 of the 1995
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2015 Carmina Y. DAversa. All rights reserved.

protocol, provides an option for small estates of a United States citizen to elect a nonrefundable
marital credit if the decedent and the surviving spouse meet residency23 and/or citizenship
requirements. The executor also must make a timely election of the credit and waive the benefits
of the marital deduction otherwise allowable under United States law.24 With the exception of
making a QTIP election, the marital credit requirements under article XXIX B, however, do not
override or modify the marital deduction requirements under section 2056(b)(7). For the estate of
a United States citizen, the amount of the credit is the lesser of the unified credit25 (before
reduction for any gift tax credit) and the amount of United States estate tax that would otherwise
be imposed by the United States on the transfer of the property to the surviving spouse before
allowable credits.26 Unlike the marital deduction under United States law, the credit reduces or
eliminates the estate tax instead of deferring the tax.27
CALCULATIONS
Calculations one and two illustrate the application of the marital deduction under United States
law and the treaty marital credit, respectively. The third calculation shows the implications of
ignoring United States law whether for purposes of the marital deduction or the credit. Each of
the calculations assume the decedent is a United States citizen, the surviving spouse is a
Canadian citizen and both are Canadian residents at time of the decedents death. No foreign tax
credit is applied. All amounts are in United States dollars.
#1: CALCULATION USING #2:
CALCULATION #3:
CALCULATION
MARITAL DEDUCTION
USING
MARITAL DISALLOWING MARITAL
CREDIT
DEDUCTION
AND
MARITAL CREDIT
This
calculation
assumes This calculation assumes This calculation assumes a
compliance with United States treaty requirements are met, Rinaldi type trust has been
law to qualify for the marital including compliance with utilized in attempting to
deduction (MD).
United States law and timely qualify closely held business
treaty election and waiver.
stock for the marital deduction
or the marital credit. Neither
deduction or credit are
allowed.
11,430, 000 Gross estate
Gross estate
11,430, 000 Gross estate
11,430,000
------------------MD
------------------(6,000,000)
5,430,000
Taxable estate 11,430,000 Taxable estate 11,430,000
Taxable estate
2,117,800
Tentative tax
4,517,800 Tentative tax
4,517,800
Tentative tax
(2,117,800)
Credit
2,117,800 Credit
2,117,800
Credit
0
Estate tax
2,400,000 Tentative tax
2,400,000
Estate tax
2,117,800 Marital credit
282,200 Estate tax

Calculation #3 demonstrates that a closely held business owners non-tax objectives may create
unfavorable tax consequences whether proceeding under the Code or under the Convention. In
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2015 Carmina Y. DAversa. All rights reserved.

fact, the marital credit may have extremely limited application for a closely held business interest
because the credit was designed primarily to reduce the estate tax burden on transfers of
personal residences and retirement annuities.28
To achieve both non-tax and United States tax objectives, the closely held business owner or his
estate, in the alternative and assuming no negative tax consequences in Canada, may want:
1. to employ pre-death estate planning methods to reduce the value of the business interest
for United States federal estate tax purposes,
2. make use of a qualified marital trust funded with other assets other than business
interests,
3. if the bulk of the estate is the business interest, rely on life insurance proceeds to provide
for the surviving spouse who is not involved in the business,
4. to recapitalize the business postmortem in order to pass nonvoting stock to the
uninvolved surviving spouse and provide voting stock to involved family members. In
that way, active business managers retain control of the business.

IRC 2001(a); 2051. Generally, a United States citizen and a United State domiciliary are taxed similarly. Ibid.
See also Regulation 20.0-1(b)(1) (defining resident decedent as having United States domicile for estate tax
purposes). United States is the fifty states and the District of Columbia. See 7701(a)(9); 20.0-1(b)(1).
2
Regulations under section 2056 specifically identify the deduction allowed under section 2056 as the marital
deduction. See Reg. 20.2056(a)-1(a) (italics in original).
3
For purposes of this article, the term unified credit is used interchangeably with the term applicable credit
amount. Although the term unified credit is replaced in section 2010, paragraph four of article XXIX B of the
US-Canada Income Tax Convention refers to the unified creditunder the law of the United States in
determining the allowable amount of a marital credit under the protocol. See Convention, art. XXIX B, para. 4. See
also notes 21-26 and accompanying text.
4
2010(c)(3). In the case of the estate of a United States citizen or domiciliary, the basic exclusion amount also may
be increased by a previous deceased spouses unused exclusion amount if the executor of the previous deceased
spouse timely and properly elected portability of the unused amount. 2010(c)(2); 2010(c)(5)(A).
5
Revenue Procedure 2014-61, 2014-2 C.B. 860 (October 30, 2014).
6
2010(a); 2001(c).
7
2001(c).
8
2056(b); 2044.
9
Reg. 20.2056(b)-1(b).
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2015 Carmina Y. DAversa. All rights reserved.

10

Id.
An executor appointed, qualified and acting within the United States makes the election, regardless of whether the
property is in his or her possession. In the absence of a United States executor, a person in actual or constructive
possession of the property (or, if not in possession and the person in possession has not made the election,) may
make the election with respect to the property. See Reg. 20.2056(b)-7(b)(3).
12
2056(b)(7)(B)(v). See also Reg. 20.2056(b)-7(b)(4) (manner and time of making election).
13
2056(b)(7)(B)(ii).
14
38 Fed. Cl. 341 (1997), affd, 178 F.2d 1308 (Fed. Cir. 1998) (without opinion), cert. denied, 526 U.S. 1006
(1999).
15
See Reg. 20.2056(b)-5(f)(5).
16
For purposes of United States federal estate taxation, fair market value is defined as the price at which the
property would change hands between a willing buyer and a willing seller, neither being under any compulsion to
buy or to sell and both having reasonable knowledge of relevant facts. See Reg. 20.2031-1(b).
17
2056(d)(1)(A). United States domicile is not sufficient. See Reg. 20.2056A-1(a) (introductory sentence). The
surviving spouse also meets the United States citizenship requirement if (1) the surviving spouse becomes a United
States citizen before the day on which the United States federal estate tax return is filed and (2) the surviving spouse
was a United States resident at all times after the decedents date of death and before becoming a United States
citizen. See 2056(d)(4). See also Reg. 20.2056A(b) (referring to Reg. 20.0-1(b)(1) in defining resident) and
note 1.
18
2056(d)(2).
19
The tax imposed under section 2056A(b) may be triggered by a distribution of principal from the QDOT during
the surviving spouses lifetime. See 2056A(b)(1)(A); Reg. 20.2056A-5(b)(1). The tax is tantamount to the tax that
would have been imposed if the property had been included in the estate of the previously deceased spouse and not
been deductible under section 2056. See 2056A(b)(2); Reg. 20.2056A-5(a).
20
2056A(d); Reg. 20.2056A-3(a). If property directly passes to a QDOT, both a QDOT election and a QTIP
election must be made if relying on section 2056(b)(7) to ensure the QDOT trust complies with the terminable
interest rule. See Reg. 20.2056A-2(b)(1).
21
See Convention, art. XXIX (Miscellaneous Rules), as amended.
22
See id. See also IRM 4.25.4.5.3 (01-06-2015) (explaining how to report marital credit on page 1 of Form 706,
return utilized in calculating the estate tax of the estate of a United States citizen or domiciliary).
23
For purposes of the Convention, residency is not necessarily domicile. See Convention, art. IV (Residence), as
amended.
24
Convention, art. XXIX B, para. 3.
25
The current statutory term, applicable credit amount, is not used in the Convention. See notes 3 and 4 and
accompanying text. Nonetheless, query whether the estate of a United States citizen may utilize a deceased spouses
unused exclusion amount in determining the unified creditunder the law of the United States for purposes of
calculating the marital credit amount. See id.
26
Convention, art. XXIX B, para. 4.
27
That is, there is no later inclusion of the property, subject to the marital credit, in the estate of surviving spouse
under section 2044. See U.S. Treasury Department Technical Explanation (marital credit).
28
See Joint Committee on Taxation, JCS-15-95 at 16.
11

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2015 Carmina Y. DAversa. All rights reserved.