Fractional Formula Clause for One-Settlor Trust
(Marital Deduction Share and Nonmarital Share) (CA)

Summary

This is a fractional formula clause for a one-settlor inter vivos trust. It requires the trustee to divide the trust estate into a marital deduction share and a nonmarital share, and to determine the value of the marital deduction share according to a fractional formula. The division will be made upon the settlor's death, but only if the settlor is survived by his or her spouse. This clause should not be used with registered domestic partners as they do not qualify for the marital deduction. This clause is used in California. It includes practical guidance and drafting notes. When a fractional formula clause is used, a fractional share of each trust asset will be allocated to the marital deduction share and the nonmarital share. The marital deduction share is designed to qualify for the federal estate tax marital deduction (see I.R.C. § 2056), and the nonmarital share is designed to take advantage of the unified credit by sheltering the "applicable exclusion amount" (see I.R.C. § 2010(c)(3), as amended by the Tax Cuts and Jobs Act, 115 P.L. 97, 131 Stat. 2054, § 11061(a) (2017) and Rev. Proc. 2022-38, 2022 IRB LEXIS 437, § 3.41 (I.R.S. 2022) in the estate of the first spouse to die and "bypassing" the estate of the surviving spouse. The fractional share that is allocated to the marital deduction share is typically stated as the smallest fractional share of the residuary assets necessary to eliminate estate taxes in the client's estate, or to reduce those taxes to the maximum extent possible. The funding and valuation problems that arise when pecuniary formula clauses are used do not arise when fractional formulas are used. It is not necessary for the executor or trustee to allocate particular assets to the marital deduction and nonmarital shares, since each asset is divided between the two shares, and no beneficiary can claim that another beneficiary got "better" assets. However, since fractional formula clauses require the different beneficiaries to become co-owners of each asset, administrative difficulties can arise. For this reason, fractional formula clauses are used less frequently than pecuniary formula clauses, although some estate planners prefer them. For more information on trusts, see Characteristics and Uses of Trusts (CA) and Requirements and Restrictions on Trust Purposes and Administration (CA).