Estate planning for married couples can be tricky when one spouse is significantly wealthier than the other, and each spouse wants different beneficiaries to ultimately inherit their estate. One solution to this problem is the 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 $11.4 million in 2019), 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 $20 million. With the AB Trust strategy, if Sue dies first, the B Trust is funded with $11.4 million and the A Trust is funded with $8.6 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.”
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 to the hypothetical couple:
● During Fred’s lifetime, he 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 Fred dies, the assets remaining in the trust will be included in his estate, thereby making use of his federal estate tax exemption, which might otherwise not be fully utilized
● If Fred dies first, the remaining trust funds may continue in an asset-protected, lifetime trust for Sue’s benefit (subject to applicable state law)
● Even though Sue initially funded the trust, the assets remaining in the trust will be excluded from her estate when she dies, regardless of the order of death
● After both spouses die, the balance of the trust will pass according to Sue’s wishes
Not all married couples fit the Lifetime QTIP Trust profile. Give us a call today to schedule an appointment so we can determine if one is right for you.
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