Because the values of a married couple’s estate and the amount of the estate tax exemption change over time, estate planners commonly use formulas in a will or trust to avoid inadvertently triggering an estate tax on the first spouse’s death.  These formulas divide a deceased person’s assets between a marital share which qualifies for the unlimited marital deduction and a non-marital share which uses the deceased spouse’s estate tax exclusion amount to pass the decedent’s assets estate tax free.

There are three types of formulas: a Pecuniary Marital, a Fractional Share and a Pecuniary Credit.    Each formula has its own benefits, detriments, and uses.  The decision regarding which provision to use in the instrument is usually made by the drafting attorney, taking into consideration the type and size of the assets in the couple’s estate and the parties they intend to benefit.  While most casual readers of the instrument would consider the formula clause “boilerplate”, this provision has a material impact on the estate’s taxes and what each beneficiary receives.  The formula that works for one couple, may not work for another.  While each situation is unique, there are some general rules which we use to narrow down the choices.  The remainder of this post describes the common formulas and when they are used.

Pecuniary Marital Formula. 

A pecuniary marital formula creates an allocation of a specific dollar amount of the deceased spouse’s estate to or on behalf of the surviving spouse, making administration straightforward.   If the deceased spouse’s estate is less than his or her remaining federal gift and estate tax exemption, the amount allocated to the marital share is zero, and the balance is allocated to the non-marital share without triggering an income tax, even if the assets used to fund the marital gift have appreciated.  If the deceased spouse’s estate is greater than his or her remaining gift and estate tax exemption, there will be a tax on the appreciated assets used to fund the marital gift.  Therefore, the pecuniary marital formula is best used by a spouse with a total estate of less than or slightly over his or her remaining federal estate tax exemption (i.e. <$15,000,000 in 2026).

Fractional Share Formula. 

A fractional share formula gives a proportional or “fractional” interest in all remaining assets, which ensures equitable sharing of market fluctuations during administration but is often more burdensome to administer because the trustee must give fractional interests in each asset or fairly apportion gains and losses.  Therefore, this formula is commonly used by a spouse with a total estate of more than his or her remaining federal estate tax exemption (i.e. >$15,000,000 in 2026).

Pecuniary Credit Formula. 

A pecuniary credit formula also allocates a specific dollar amount of the deceased spouse’s estate to simplify administration, but the gift is made to the non-marital share (i.e. credit shelter, bypass or family trust) instead of the marital share discussed above.  This formula was commonly used in older documents, at a time when the gift to the marital share was comparably greater than the non-marital share because the estate tax exemption amount was smaller. Given today’s relatively higher estate tax exemption, this formula should only be used in situations where the assets will not fluctuate during the period of administration or when the marital gift is expected to exceed the non-marital gift.

Key Distinctions

The main difference lies in how the value of the gift is defined in the instrument and how appreciation or depreciation in asset values between the date of death and the date of distribution is handled from a capital gains tax and benefit perspective.  The table below compares the basic characteristics of each formula.

Feature Pecuniary Marital Formula Fractional Share Formula Pecuniary Credit Formula
Nature of Gift A gift of a specific dollar amount to the marital share. A gift of a fractional portion or percentage of the residual estate. A gift of a specific dollar amount to the non-marital share.
Sample Language I give to the marital share the smallest pecuniary amount which will produce the least amount of federal estate tax. I give to the marital share the smallest fraction of eligible trust property which will produce the least amount of federal estate tax. I give to the non-marital share the largest pecuniary amount which will produce the least amount of federal estate tax.
Administration Generally considered easier to administer as it involves funding a fixed amount, though requires revaluation of distributed assets. More complex to administer because it requires the re-determination of the percentage interest with each non-simultaneous distribution and generally requires fractionization of each asset. Generally considered easier to administer as it involves funding a fixed amount, though requires revaluation of distributed assets.
Capital Gains Tax None if no assets are allocated to the marital share.  The estate will incur capital gains taxes if assets that have appreciated since the date of death are used to satisfy the fixed dollar amount over the estate tax exemption amount. Generally avoids the capital gains problem upon funding because beneficiaries are receiving a fractional share of the property itself, not a set dollar amount. The estate will incur capital gains taxes if assets that have appreciated since the date of death are used to satisfy the fixed dollar amount.
Executor’s Flexibility Offers the fiduciary flexibility to “pick and choose” specific assets to fund each share, which can be useful for tax planning (e.g., allocating appreciating assets to the non-marital share). Generally does not permit “pick and choose” flexibility without specific drafting language, as each asset must be fractionalized proportionally.  However, Arizona law allows the fiduciary to fairly apportion gains and losses between gifts. Offers the fiduciary flexibility to “pick and choose” specific assets to fund each share, which can be useful for tax planning (e.g., allocating appreciating assets to marital share).
Asset Value Fluctuation The marital share receives the specified dollar amount regardless of market fluctuations. The non-marital share absorbs all risk of appreciation or depreciation in asset values. Both the marital and non-marital shares receive a proportionate percentage of each asset, meaning both share equally in any appreciation or depreciation. The non-marital share receives the specified dollar amount regardless of market fluctuations. The marital share absorbs all risk of appreciation or depreciation in asset values.
Best Used When Spouse’s estate is less than the spouse’s remaining estate tax exemption (i.e. <$15,000,000 in 2026). Spouse’s estate is greater than the spouse’s remaining estate tax exemption (i.e. >$15,000,000 in 2026) or includes hard to value assets such as closely held business or commercial real estate or there are GST allocation issues. Assets in Spouse’s estate will not fluctuate in value during the period of administration (i.e. cash) or when the marital gift is expected to exceed the non-marital gift (i.e. estate tax exemption used during lifetime).

Summary

The choice of formula depends heavily on the specific assets in the estate, the relationship between the beneficiaries of the marital and non-marital shares, and the relative importance of administrative ease versus potential tax consequences. Estate planning attorneys can help determine the most appropriate approach for a given situation.  Given the substantial increase in the federal gift and estate tax exemption amounts, it is time for couples to review their funding formulas to ensure the new tax law does not impact the desired results or create an unnecessary income tax on allocation.  Please give DeAngelis Legal a call today to schedule your review.