A reverse pecuniary bequest (also called a credit-consuming or nonmarital pecuniary approach) funds the credit shelter trust with a formula-determined pecuniary amount equal to the applicable exclusion and gives the residue of the estate to the marital trust. This is the opposite of the traditional marital pecuniary approach, which gives the formula amount to the marital trust and the residue to the credit shelter trust.
The reverse direction has become increasingly popular among estate planners because it applies the pecuniary bequest’s administrative complexity and tax consequences to the smaller share of the estate rather than the larger share.
Why Direction Matters
The administrative complications of a pecuniary bequest (gain or loss recognition, revaluation requirements, ratable sharing obligations under Rev. Proc. 64-19) all apply to the trust that receives the pecuniary amount. The residuary trust, by contrast, simply receives whatever is left after the pecuniary bequest is satisfied.
In a traditional marital pecuniary, these complications apply to the marital share, which is often the larger portion of the estate. In a reverse pecuniary, they apply to the credit shelter share, which (in most estates exceeding $15 million) is the smaller portion. Applying the same problems to a smaller asset pool yields smaller tax consequences, lower revaluation costs, and simpler administration.
How the Reverse Pecuniary Works
The formula reads something like: “I give to the family trust an amount equal to the maximum amount that can pass free of federal estate tax by reason of the unified credit and any other available credits and deductions, as reduced by the value of any other property passing outside this instrument that qualifies for such credits.”
The personal representative then satisfies this pecuniary amount by distributing assets to the credit shelter trust. The marital trust receives everything else as the residue.
The reverse direction also determines which trust benefits from (or bears the risk of) market movements during administration. Because the credit shelter share is fixed at death, all post-death appreciation accrues to the residuary marital trust. If the estate appreciates during a long administration, the marital trust grows larger, increasing the surviving spouse’s estate at the second death. If the estate depreciates, the marital trust absorbs the loss, reducing the amount available to the surviving spouse but also reducing the eventual estate tax.
Rev. Rul. 90-3: The Government Approved This Approach
The IRS confirmed the validity of the reverse pecuniary in Rev. Rul. 90-3, ruling that it qualifies for the marital deduction even though the marital share is a residuary interest. The ruling eliminated uncertainty about whether the residuary marital share might be treated as a nondeductible terminable interest. Practitioners now use it with confidence.
Combining Reverse Pecuniary with Fairly Representative Valuation
Many practitioners consider the fairly representative reverse pecuniary the best default funding mechanism. This combination provides three benefits: the reverse direction limits complications to the smaller credit shelter share, fairly representative valuation eliminates gain or loss recognition on funding, and the residuary marital trust receives everything that remains, avoiding a second formula calculation.
The trade-off is reduced asset allocation flexibility. The fairly representative requirement under Rev. Proc. 64-19 means the personal representative must distribute a proportionate mix of appreciated and depreciated assets to the credit shelter trust. If strategic asset allocation is essential (placing a family business in a specific trust, for example), the true worth reverse pecuniary provides more flexibility at the cost of potential gain recognition.
When the Reverse Pecuniary Is Not the Best Choice
The reverse pecuniary is not ideal for every estate. Three situations favor a different approach:
- Estates where the credit shelter share is very large relative to the marital share. If the applicable exclusion absorbs most or all of the estate, the “smaller share” advantage disappears. In these estates, the marital share may be small or zero, and the direction of the formula matters less.
- Estates where specific assets must go to the marital trust. If the surviving spouse needs specific assets (a residence, a particular investment portfolio), a traditional pecuniary marital may be more straightforward because the personal representative directly selects the marital trust’s assets.
- Estates where the single fund marital approach is appropriate. When the family values simplicity above flexibility, the single fund marital avoids actual division entirely and may be preferable to either direction of pecuniary bequest.
For most estates above the applicable exclusion amount, the reverse pecuniary (particularly the fairly representative reverse pecuniary) is the practitioner’s default choice. It applies funding complexity to the smaller share, avoids gain recognition, and gives the surviving spouse the residuary interest in the estate.