Estate planning for married couples in Colorado can be tricky when one spouse is significantly wealthier than the other and each spouse wants different beneficiaries to ultimately inherit their estate. One solution to this problem is the Lifetime QTIP (Qualified Terminal Interest Property) Trust.
What is a Lifetime QTIP Trust?
One traditional estate planning model for married couples makes use of the “AB Trust” strategy. After the first spouse dies, the “B Trust” holds an amount equal to the federal estate tax exemption (currently $5.43 million in 2015), and the “A Trust” holds the excess. The “A Trust” can be designed as a “QTIP Trust” or “Marital Deduction Trust” which qualifies for the unlimited marital deduction, meaning that the property passing into the trust for the benefit of the surviving spouse will not be subject to estate taxes until the surviving spouse dies.
For example, Fred and Sue are in a second marriage, have their own children, and their estates are disproportionate – Fred is worth $2 million and Sue is worth $10 million. With the AB Trust strategy, if Sue dies first, the B Trust is funded with $5.34 million and the A Trust is funded with $4.66 million. No estate tax will be due at Sue’s death since the B Trust uses up Sue’s federal estate tax exemption and the A Trust qualifies for the unlimited marital deduction.
What if instead of creating and funding the QTIP Trust after the wealthier spouse dies, the QTIP Trust is created and funded with gifts from the wealthier spouse that qualify for the unlimited marital deduction while both spouses are living? This is the “Lifetime QTIP Trust.”
What Are the Benefits of a Lifetime QTIP Trust?
For married couples whose estates are lopsided and the wealthier spouse wants to provide for the less wealthy spouse but ultimately benefit his or her own heirs, a Lifetime QTIP Trust offers the following benefits:
• During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and, depending on the trust’s design, may be entitled to receive principal for limited purposes (such as health, education and maintenance)
• When the less wealthy spouse dies, the assets remaining in the trust will be included his or her estate, thereby making use of the less wealthy spouse’s federal estate tax exemption which might otherwise not be fully utilized
• If the less wealthy spouse dies first, the remaining trust funds may continue in an asset-protected, lifetime trust for the wealthier spouse’s benefit (subject to applicable state law)
• Even though the wealthier spouse initially funded the trust, the assets remaining in the trust will be excluded from the wealthier spouse’s estate when he or she dies, regardless of the order of death
• After both spouses die, the balance of the trust will pass according to the wealthier spouse’s wishes
Is a Lifetime QTIP Trust Right for You and Your Spouse?
Not all married couples fit the Lifetime QTIP Trust profile. If you and your spouse do, then sit down with an estate planning attorney with Davis Schilken, PC to determine if one is right for you.
For your planning needs, please contact the experienced estate planning and probate attorneys at Davis Schilken. Call us at 303-670-9855 to arrange a consultation at one of our two locations in The Denver Tech Center and Golden, Colorado. We look forward to working with you.