Ever wondered how some are able to bypass federal transfer taxes when their spouse dies? Although the answer is simple, the logistics can be a bit overwhelming. A marital deduction trust is most likely what these couples put into place when they’re making their estate plans. When one dies, the surviving spouse is able to transfer property and assets with no worries of a federal transfer tax. These trusts are created in a few ways; either through a life estate that includes a power of appointment for the surviving spouse or a Qualified Terminable Interest Property, or QTIP, trust. This week, we explore the ever-important marital deduction trust.
The Benefits of the Marital Deduction Trust
- When the surviving spouse dies, the assets in the trust aren’t considered part of her estate, thereby bypassing some taxes. In other words, both spouses are protected.
- Even if the assets in the trust are more than the current federal estate tax exemption, there still won’t be federal estate penalties.
- There are several ways to make the most of these types of trusts, including the option of bypassing a surviving spouse completely in terms of transferring the property, though she can still benefit from the trust’s income.
QTIP Trusts
These legal documents allows you to put into place who will inherit the trust after both spouses have died. These trusts, once in place, can’t be changed if the surviving spouse wants to reroute it. Frankly, couples who have had previous spouses and children from those marriages will likely prefer the hard lines of a QTIP trusts. Those who have built their lives together since they were young and there are no “his children”, “her children” will probably opt for the straight-line marital deduction trust – though the QTIP would work as well.
Couples in their second or third marriages might want to ensure the surviving spouse doesn’t change the marital deduction trust in a way that would benefit each other’s children at the expense of their own. For them, the QTIP trust is most certainly the best protection against that. Another reason these specific trusts might be a better choice is that any charities you want to benefit from your estate are guaranteed to receive those assets once the remaining spouse dies. This brings us to the bypass trust.
Bypass Trusts
Some couples opt for a bypass trust in order to protect assets and property from estate taxes. It gets its name because it also bypasses the surviving spouse. Many families, instead of simply leaving property for their children in their will, instead choose to hold it in a trust. The surviving spouse will benefit from the trust, but never takes possession and never owns the trust. It eliminates the trust moving through another estate plan, or at least until your children include it in theirs. There are benefits to these types of trusts, but it might not be right for everyone.
Estate planning has never been more important; the smallest overlooked detail can result in big problems after your death. These marital deduction trusts play a pivotal role for millions of couples, but only if they’re created in such a way that it serves its purpose and never becomes a burden to those who receive it. To learn more about estate planning and establishing trusts, contact our offices today.
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