Estate planning for couples in a second or later marriage who have disproportionate estates can be tricky. One solution for allowing the well-to-do spouse to maintain control of their assets but keep their other half happy is the Lifetime QTIP Trust.
The Basics of Creating a Lifetime QTIP Trust
In the estate planning world a “QTIP Trust” is a type of trust that allows a wealthier spouse to transfer an unrestricted amount of assets into trust for the benefit of their less wealthy spouse free from estate and gift taxes.
Typically married couples would make use of a QTIP Trust after death under the “AB Trust” strategy: After the first spouse dies the “B Trust” holds an amount equal to the federal estate tax exemption (currently $5.43 million in 2015) and the “A Trust” holds the excess. Under this strategy the “A Trust” is in fact a “QTIP Trust” which qualifies for the unlimited marital deduction, meaning that property passing into the trust will not be subject to estate taxes until the surviving spouse dies.
But what if instead of creating and funding the QTIP Trust after death, the wealthy spouse creates and funds the QTIP Trust for their spouse’s benefit with tax free gifts while the wealthy spouse is alive? This is the “Lifetime QTIP Trust” which must meet the following criteria to qualify for the unlimited marital deduction:
- The trust must be irrevocable.
- The trust must be created for the benefit of a spouse who is a U.S. citizen.
- The spouse must be entitled to receive all of the net income from the trust at least annually.
- The spouse must have the right to demand that any non-income producing property be converted into income-producing property.
- The spouse must be the only one who has the power to appoint trust property.
- A federal gift tax return must be timely filed.
Planning With a Lifetime QTIP Trust Offers a Multitude of Benefits
Outright gifts to your spouse during life or after death lead to total loss of control. If you and your spouse have lopsided estates and families from prior marriages the problem is exacerbated by the difference in your wealth – while the well-to-do spouse will be just fine if the less wealthy spouse dies first, the opposite is not true. If you and your spouse are in this situation, a Lifetime QTIP Trust offers the following benefits:
- The wealthy spouse can create and fund a Lifetime QTIP Trust without using any gift tax exemption.
- The generation-skipping transfer tax exemption is not portable, so a Lifetime QTIP Trust can be used to take advantage of the less wealthy spouse’s exemption. This might reduce overall taxes.
- During the less wealthy spouse’s lifetime he or she will receive all of the trust income and may be entitled to receive trust principal for limited purposes.
- 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 otherwise unused federal estate tax exemption.
- If the less wealthy spouse dies first, the remaining trust property can continue in an asset-protected, lifetime trust for the wealthy spouse’s benefit (subject to applicable state law) and the remainder will be excluded from the wealthy spouse’s estate when he or she dies.
- After both you and your spouse die, the balance of the trust will pass to the wealthy spouse’s children and grandchildren or other beneficiaries chosen by the wealthy spouse.
Do You and Your Spouse Need a Lifetime QTIP Trust?
As with other types of estate planning, Lifetime QTIP Trusts are not “one size fits all” and must be specifically tailored to each couple’s unique family dynamics and financial situation. Please call our firm if you think you and your spouse fit the Lifetime QTIP Trust profile and we will help you determine what will work best for your family.
George Plastiras L.L.M of Taxation – Georgetown University J.D. – University of Arkansas