Caution: Writing Your Own Deed to Avoid Probate Can Lead to Unintended Consequences
What is a Lifetime QTIP Trust?
One traditional estate planning model for married couples makes use of the “AB Trust” strategy. After the first spouse dies, the “B Trust” holds an amount equal to the federal estate tax exemption (currently $5.34 million in 2014), and the “A Trust” holds the excess. The “A Trust” is a “QTIP Trust” or “Marital Deduction Trust” which qualifies for the unlimited marital deduction, meaning that the property passing into the trust for the benefit of the surviving spouse will not be subject to estate taxes until the surviving spouse dies.
For example, Fred and Sue are in a second marriage, have their own children, and their estates are disproportionate – Fred is worth $2 million and Sue is worth $10 million. With the AB Trust strategy, if Sue dies first, the B Trust is funded with $5.34 million and the A Trust is funded with $4.66 million. No estate tax will be due at Sue’s death since the B Trust uses up Sue’s federal estate tax exemption and the A Trust qualifies for the unlimited marital deduction.
What if instead of creating and funding the QTIP Trust after the wealthier spouse dies, the QTIP Trust is created and funded with gifts from the wealthier spouse that qualify for the unlimited marital deduction while both spouses are living? This is the “Lifetime QTIP Trust.”
What Are the Benefits of a Lifetime QTIP Trust?
For married couples whose estates are lopsided and the wealthier spouse wants to provide for the less wealthy spouse but ultimately benefit his or her own heirs, a Lifetime QTIP Trust offers the following benefits:
- During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and, depending on the trust’s design, may be entitled to receive principal for limited purposes (such as health, education and maintenance)
- When the less wealthy spouse dies, the assets remaining in the trust will be included his or her estate, thereby making use of the less wealthy spouse’s federal estate tax exemption which might otherwise not be fully utilized
- If the less wealthy spouse dies first, the remaining trust funds may continue in an asset-protected, lifetime trust for the wealthier spouse’s benefit (subject to applicable state law)
- Even though the wealthier spouse initially funded the trust, the assets remaining in the trust will be excluded from the wealthier spouse’s estate when he or she dies, regardless of the order of death
- After both spouses die, the balance of the trust will pass according to the wealthier spouse’s wishes
Is a Lifetime QTIP Trust Right for You and Your Spouse?
Not all married couples fit the Lifetime QTIP Trust profile. If you and your spouse do, then sit down with your estate planning attorney to determine if one is right for you.
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