While an estate plan will often concentrate on the credit shelter trust or B trust side of an A-B trust, advisors should also give attention to what will be left over to a surviving spouse under the unlimited marital deduction.
In today’s world of multiple marriages and stories of seniors passing on millions to their last caregivers and disinheriting their children, determining what happens to the entire estate should be a major part of the planning discussion.
A qualified terminable interest property (QTIP) trust could be used as an estate planning tool for married couples where, at death, one spouse passes assets to the surviving spouse but maintains some control over the assets during the life of the survivor as well as after the survivor’s death. QTIPs are often exercised in second marriage scenarios where the wealthier spouse wants to allow for the survivor to live comfortably after his or her death, but also wants the remainder to go to the children from the first marriage.
QTIPs may also be used to protect a financially unsophisticated spouse from being taken advantage of or frittering away an inheritance due to a lack of understanding of the financial markets. A properly drawn QTIP will better protect a frail or failing elderly spouse from being taken advantage of by predators posing as caregivers.
A QTIP trust is similar to a B trust, but there are significant differences. The primary goal of the B trust is to leave a legacy to beneficiaries while also providing for the surviving spouse if necessary. The B trust is created to minimize the impact of estate taxes on the inheritance. Conversely, a QTIP trust’s primary objective is to provide for the survivor while not allowing total control of the assets.
Usually a B trust is funded with the federal excluded amount; the remainder (under the marital exemption) flows into the QTIP trust. The downside is that the QTIP trust assets are included in the surviving spouse’s estate even though the trust is irrevocable and the survivor has no ability to change who will receive the remainder from the trust.