Credit Shelter Trusts and QTIP Trusts

A/B TRUSTS

An A/B trust plan is a plan to use the full combined amount of your and your spouse’s estate tax exemption.  This pays for itself when you and your spouse together expect to have a little under $2.3M in assets, and rapidly becomes a better investment as your assets increase beyond that point.  For example, in Washington State this plan will save you $300,000 in taxes on a joint estate of about $5.2M.

The B Trust is a “Bypass Trust,” also called a “credit shelter trust” and takes all of your assets up to the amount of your estate tax exemption limit.  It is set up for the Maintenance, Education, Support and Health of a person or people (usually your spouse) and the trustee has wide discretion in how to spend it for that person within those limits.

The A Trust is a “Marital Trust.”  Although a Marital Trust is not necessary to use the credit shelter trust and get estate tax savings, a Marital Trust is frequently used if there are children from a prior marriage or there is thought that the surviving spouse might remarry, for example. In these cases, the marital trust is typically a QTIP Trust.  Using a Marital Trust may also be useful if you want to name a financial professional to be in charge of managing the assets you leave for your spouse.

QTIP TRUSTS

A Qualified Terminable Interest Property (QTIP) Trust is a trust that qualifies for special treatment under tax law because your spouse is the beneficiary of the trust for her lifetime, but the remainder of the trust when she passes away goes to someone else, such as children from a prior marriage.  See I.R.C. § 2056(5).

The special tax treatment allows you to treat the trust as if it is an ordinary asset passed to a spouse (so you do not pay estate tax on it at your death), but when the second spouse to die passes away the remaining proceeds go to the beneficiaries named by the first spouse to die.  This does not escape estate tax, but it does (1) let you delay estate tax on funds given to your heirs until your spouse dies and (2) limit your spouse’s use of the funds and ensure that even if he or she grows more distant from your heirs after you pass away, your heirs will remain your beneficiaries.

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