2. QTIP Trust
With large estates the QTIP trust provides a way to defer estate taxes by taking advantage of the marital deduction, yet “control from the grave” by directing who will eventually receive the property upon the death of the surviving spouse.
Under such a trust all income must be paid at least annually to the surviving spouse. The trust can be invaded only for the benefit of the surviving spouse, and no conditions can be placed upon the surviving spouse’s right to the income (e.g., it is not permitted to terminate payments of income should the spouse remarry). However, in order to qualify the executor must make an irrevocable election to have the marital deduction apply to property placed in the trust. This requirement not only gives the executor the power to determine how much, if any, of the estate will be taxed at the first death, it also provides great flexibility for post death planning based upon changing circumstances.
Our example assumes that in 2013 we have an estate of $11,500,000.
UPON THE FIRST DEATH, the estate is divided into two parts, with one part equal to $5,250,000 placed in a family or nonmarital trust (“B” trust in the chart). No taxes are paid on this amount since the trust takes full advantage of the $2,045,800 unified credit (i.e., the amount of credit in 2013 that allows each individual to pass $5,250,000 tax-free to the next generation). The remaining $6,250,000 is placed in the QTIP trust.
The executor may elect to have all, some, or none of this property treated as marital deduction property. Assume that in order to avoid appreciation of assets in the surviving spouse’s estate and obtain a stepped-up basis for additional assets taxed upon the first death the executor decides to make a partial election of $5,750,000 (i.e., of the $6,250,000 placed in the QTIP trust only $5,750,000 will be sheltered from estate taxes at the first death). This means that $500,000, the “nonelected” property, will be taxed at the first death. Although $200,000 of estate taxes must be paid, the remaining $300,000 will now be excluded from the taxable estate of the surviving spouse (any appreciation of this property after the first death will also be excluded). If authorized under the trust document or by state law, the executor can sever the QTIP trust into separate trusts.
UPON THE SECOND DEATH, the estate subject to taxation is limited to $5,750,000 (the amount remaining in the trust for which estate taxes were deferred). After paying taxes of $200,000, there remains $5,550,000. This amount, together with the $300,000 from the severed trust and the $5,250,000 from the “B” trust, are passed to the beneficiaries under the terms previously established in these trusts.
Information required for analysis & proposal
Attorney Drafting Will And Trust Must Know
1. Spouse’s name.
2. Children’s names.
3. Name of executor/executrix.
4. Ages of minor children.
5. Information regarding children of prior marriages.
6. Names and ages of other beneficiaries.
7. Trustee after testator’s death.
8. To whom, in what amounts, and when trust income is to be paid.
9. To whom, in what amounts, and when trust corpus is to be paid.
With large estates the QTIP trust provides a way to defer estate taxes by taking advantage of the marital deduction, yet “control from the grave” by directing who will eventually receive the property upon the death of the surviving spouse.
Under such a trust all income must be paid at least annually to the surviving spouse. The trust can be invaded only for the benefit of the surviving spouse, and no conditions can be placed upon the surviving spouse’s right to the income (e.g., it is not permitted to terminate payments of income should the spouse remarry). However, in order to qualify the executor must make an irrevocable election to have the marital deduction apply to property placed in the trust. This requirement not only gives the executor the power to determine how much, if any, of the estate will be taxed at the first death, it also provides great flexibility for post death planning based upon changing circumstances.
Our example assumes that in 2013 we have an estate of $11,500,000.
UPON THE FIRST DEATH, the estate is divided into two parts, with one part equal to $5,250,000 placed in a family or nonmarital trust (“B” trust in the chart). No taxes are paid on this amount since the trust takes full advantage of the $2,045,800 unified credit (i.e., the amount of credit in 2013 that allows each individual to pass $5,250,000 tax-free to the next generation). The remaining $6,250,000 is placed in the QTIP trust.
The executor may elect to have all, some, or none of this property treated as marital deduction property. Assume that in order to avoid appreciation of assets in the surviving spouse’s estate and obtain a stepped-up basis for additional assets taxed upon the first death the executor decides to make a partial election of $5,750,000 (i.e., of the $6,250,000 placed in the QTIP trust only $5,750,000 will be sheltered from estate taxes at the first death). This means that $500,000, the “nonelected” property, will be taxed at the first death. Although $200,000 of estate taxes must be paid, the remaining $300,000 will now be excluded from the taxable estate of the surviving spouse (any appreciation of this property after the first death will also be excluded). If authorized under the trust document or by state law, the executor can sever the QTIP trust into separate trusts.
UPON THE SECOND DEATH, the estate subject to taxation is limited to $5,750,000 (the amount remaining in the trust for which estate taxes were deferred). After paying taxes of $200,000, there remains $5,550,000. This amount, together with the $300,000 from the severed trust and the $5,250,000 from the “B” trust, are passed to the beneficiaries under the terms previously established in these trusts.
Information required for analysis & proposal
Attorney Drafting Will And Trust Must Know
1. Spouse’s name.
2. Children’s names.
3. Name of executor/executrix.
4. Ages of minor children.
5. Information regarding children of prior marriages.
6. Names and ages of other beneficiaries.
7. Trustee after testator’s death.
8. To whom, in what amounts, and when trust income is to be paid.
9. To whom, in what amounts, and when trust corpus is to be paid.
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