Revocable Living Trust: This trust can be amended in any way or fully revoked while the settlors are still alive and competent. There can be a single person trust or a trust specifically for married couples. The following are examples of the trusts included in a married couple’s trust:SURVIVOR’S TRUST
When a married couple creates a joint revocable living trust, both couple members generally act as trustees during their life. When the first spouse dies (the "deceased spouse"), several approaches may be taken in distributing his or her property. If the entire estate of the couple has a net value of not more than the current federal tax exemption ($3.5 million in 2009) the first spouse may wish to leave everything to the Surviving Spouse. The Surviving Spouse then has ownership of the entire estate, consisting of his/her own property and that received from the deceased spouse.
After the first spouse’s death, the entire estate may be held and administered for the benefit of the Surviving Spouse in a SURVIVOR’S TRUST. Having the trust continue in this manner will avoid a probate on the second spouse’s death. The Survivor Trust can be fully revocable during the Surviving Spouse’s life. The Surviving Spouse can be the Trustee of the Survivor Trust and have complete control over the property in the trust. When the Surviving Spouse dies, he or she can leave the entire remaining trust estate to the beneficiaries of his/her choice by exercising a general power of appointment. If the Surviving Spouse does not exercise the power of appointment, distributions to beneficiaries will be made by way of the default provisions in the trust instrument which the spouses decided on jointly while both were alive. In this scenario, there will be no estate tax payable on the death of either spouse since the value of the estate at both spouse’s death was less than the current tax exemption.
After the first spouse’s death, the entire estate may be held and administered for the benefit of the Surviving Spouse in a SURVIVOR’S TRUST. Having the trust continue in this manner will avoid a probate on the second spouse’s death. The Survivor Trust can be fully revocable during the Surviving Spouse’s life. The Surviving Spouse can be the Trustee of the Survivor Trust and have complete control over the property in the trust. When the Surviving Spouse dies, he or she can leave the entire remaining trust estate to the beneficiaries of his/her choice by exercising a general power of appointment. If the Surviving Spouse does not exercise the power of appointment, distributions to beneficiaries will be made by way of the default provisions in the trust instrument which the spouses decided on jointly while both were alive. In this scenario, there will be no estate tax payable on the death of either spouse since the value of the estate at both spouse’s death was less than the current tax exemption.
BYPASS TRUST
If a married couple’s estate exceeds the current tax exemption in value it is advisable to create a BYPASS TRUST or EXEMPTION TRUST/CREDIT SHELTER TRUST (or the "B" Trust of an A-B Trust arrangement) rather than have the deceased spouse leave everything to the Surviving Spouse. In this manner an estate valued at $3.5 million can pass without the payment of estate taxes on either spouse’s death, resulting in a net estate tax savings.
A BYPASS TRUST utilizes the deceased spouse’s $3.5 million applicable exclusion amount where it would not be utilized if his/her estate were left solely to the Surviving Spouse. The terms of the Bypass trust become irrevocable at the first spouse’s death, may provide that up to all of the trust income be distributed to the Surviving Spouse. Additionally trust principal may be distributed to the Surviving Spouse as necessary to meet his/her needs for health, education, support, and maintenance. This is known as an "ascertainable standard" and is somewhat more restrictive than the unlimited standard for distributing principal in the Survivor Trust.
The property in the Bypass Trust will not be included in the Surviving Spouse’s estate and subject to estate tax at his/her death. The Surviving Spouse can be the Trustee of the Bypass Trust. At the Surviving Spouse’s death the property will be left to beneficiaries (such as children) whom the spouses decided jointly while both were alive, or if specified in the original trust instrument, according to the Surviving Spouse’s exercise of a special power of appointment (a power of appointment by which the Surviving Spouse selects among beneficiaries other than himself/herself, his or her estate or creditors, or the creditors of his /her estate). Any increase in the value of the property in the Bypass Trust will not be subject to estate tax. I.E. if the property placed into the Bypass Trust at the death of the deceases spouse was $3.5 million and that asset has increased in value to $4 million, that increase will not be subject to estate tax. However, there may be additional taxes due from the beneficiary, for example, capital gains tax.
QUALIFIED TERMINABLE INTEREST PROPERTY (QTIP PROPERTY)
There may be situations in which a spouse wishes to leave his/her property to the beneficiaries of his/her choice, such as the children from a prior marriage, but still have the property be included in the Surviving Spouse’s estate for estate tax purposes. This might happen if the first spouse owned the bulk of the estate and the Surviving Spouse’s share of the estate would be enough to fully utilize her applicable exclusion amount, or if the couple’s estate exceeds that exclusion amount in value and the couple felt it would be wise to defer estate taxes until the Surviving Spouse’s death.
In this example, it is assumed that the couple is worth $6.5 million, that $4.5 million of the estate consists of the first spouse’s separate property and share of the community property, and that the first spouse wants to leave his entire estate to the beneficiaries of his choice without paying estate tax on the death of either spouse.
At the first spouse’s death $3.5 million of his share of the estate is placed in a Bypass Trust, $1 million of his share is placed in a QTIP trust (the remainder beneficiaries of both trusts having been determined by him) and the Surviving Spouse’s $1.5 million share is placed in the Survivor’s Trust.
The terms of the QTIP trust, which has become irrevocable on the first spouse’s death, must provide that all trust income is paid to the Surviving Spouse at least annually and that no person has the power to appoint any of the trust principal to anyone other than the Surviving Spouse during her life. If the deceased Spouse’s executor makes a QTIP election, the property allocated to the QTIP trust will receive the marital deduction and be included in the taxable estate of the Surviving Spouse at her death even though her interest in it terminates and she has no power to appoint the beneficiary.
MARITAL DEDUCTION TRUST
The Marital Trust can be tailored to meet the needs of different people. This includes not only the distribution of assets upon the death of the first spouse but also the distribution of assets upon the death of the remaining spouse. Because the first spouse’s estate can take advantage of the estate tax marital deduction, but the estate of the unmarried survivor cannot, most estate tax problems do not arise until the death of the Surviving Spouse.
1. How the Marital Trust Works: A marital trust can be created for each individual situation. Below is an example of a basic marital trust arrangement:
Generally, in a marital trust arrangement, the first spouse’s property is divided into two (2) separate portions. One portion is used to create a marital deduction trust. This trust takes advantage of the estate marital deduction. The Economic Recovery Tax Act 1981 exempts all transfers of property between married couples from estate and gift taxes. Basically, this means one spouse can pass as much property to the other spouse, at death, with no estate or gift tax consequences.
To qualify for the marital deduction, the property must pass to the Surviving Spouse outright, or the Surviving Spouse must be given a general power of appointment over the property. A general power of appointment means that the Surviving Spouse has the power to appoint or give the property to anyone she chooses, including herself. If the Surviving Spouse has a general power of appointment over the marital deduction trust, then the property in the trust will not be taxed upon the death of the first spouse. However, it will be subject to estate taxation upon the death of the Surviving Spouse only if the property in the Surviving Spouse’s estate exceeds the federal tax exemption limit, which is currently $3.5 million.
When the Surviving Spouse dies, the remainder trust property passes to the ultimate beneficiaries named by the settlor. The remainder trust property is not included in the Surviving Spouse’s estate upon her death. The last fact is the crucial reason dual trust format can decrease the total estate taxes paid by a couple. The marital deduction trust reduces the estate taxes paid by the Surviving Spouse.
By using the marital deduction trusts, a couple can reap other benefits. The remainder trust property will not go through probate upon the Surviving Spouse’s death. This results in a savings on probate expenses, attorney’s fees and other related estate administration expenses.
In this example, it is assumed that the couple is worth $6.5 million, that $4.5 million of the estate consists of the first spouse’s separate property and share of the community property, and that the first spouse wants to leave his entire estate to the beneficiaries of his choice without paying estate tax on the death of either spouse.
At the first spouse’s death $3.5 million of his share of the estate is placed in a Bypass Trust, $1 million of his share is placed in a QTIP trust (the remainder beneficiaries of both trusts having been determined by him) and the Surviving Spouse’s $1.5 million share is placed in the Survivor’s Trust.
The terms of the QTIP trust, which has become irrevocable on the first spouse’s death, must provide that all trust income is paid to the Surviving Spouse at least annually and that no person has the power to appoint any of the trust principal to anyone other than the Surviving Spouse during her life. If the deceased Spouse’s executor makes a QTIP election, the property allocated to the QTIP trust will receive the marital deduction and be included in the taxable estate of the Surviving Spouse at her death even though her interest in it terminates and she has no power to appoint the beneficiary.
MARITAL DEDUCTION TRUST
The Marital Trust can be tailored to meet the needs of different people. This includes not only the distribution of assets upon the death of the first spouse but also the distribution of assets upon the death of the remaining spouse. Because the first spouse’s estate can take advantage of the estate tax marital deduction, but the estate of the unmarried survivor cannot, most estate tax problems do not arise until the death of the Surviving Spouse.
1. How the Marital Trust Works: A marital trust can be created for each individual situation. Below is an example of a basic marital trust arrangement:
Generally, in a marital trust arrangement, the first spouse’s property is divided into two (2) separate portions. One portion is used to create a marital deduction trust. This trust takes advantage of the estate marital deduction. The Economic Recovery Tax Act 1981 exempts all transfers of property between married couples from estate and gift taxes. Basically, this means one spouse can pass as much property to the other spouse, at death, with no estate or gift tax consequences.
To qualify for the marital deduction, the property must pass to the Surviving Spouse outright, or the Surviving Spouse must be given a general power of appointment over the property. A general power of appointment means that the Surviving Spouse has the power to appoint or give the property to anyone she chooses, including herself. If the Surviving Spouse has a general power of appointment over the marital deduction trust, then the property in the trust will not be taxed upon the death of the first spouse. However, it will be subject to estate taxation upon the death of the Surviving Spouse only if the property in the Surviving Spouse’s estate exceeds the federal tax exemption limit, which is currently $3.5 million.
When the Surviving Spouse dies, the remainder trust property passes to the ultimate beneficiaries named by the settlor. The remainder trust property is not included in the Surviving Spouse’s estate upon her death. The last fact is the crucial reason dual trust format can decrease the total estate taxes paid by a couple. The marital deduction trust reduces the estate taxes paid by the Surviving Spouse.
By using the marital deduction trusts, a couple can reap other benefits. The remainder trust property will not go through probate upon the Surviving Spouse’s death. This results in a savings on probate expenses, attorney’s fees and other related estate administration expenses.
