For wealthy married decedents, the portion of the estate taking advantage of the marital deduction for federal purposes may be less than the state marital deduction. Therefore, making a separate state QTIP election will help to achieve tax efficiency.
In Massachusetts, for example, where a separate state QTIP election is allowed, the estate plan of a married person with a $10 million estate will usually be designed to create three testamentary trusts:
(1) a credit shelter trust to hold the $1 million that’s exempt from both state and federal estate tax;
(2) a marital trust to hold the difference between the Massachusetts exemption amount of $1 million and the federal exemption amount of $5.45 million (that is, $4.45 million in 2016), for which a Massachusetts-only QTIP election will be made; and
(3) a marital trust to hold any assets over $5.45 million, which would be a QTIP trust for both state and federal purposes.
The Massachusetts-only QTIP trust won’t be subject to federal estate tax on the death of the surviving spouse; only Massachusetts estate tax will be imposed, allowing any appreciation to escape federal estate tax on the death of the surviving spouse.
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