Text Resize
Print
Email
Subsribe to RSS Feed
Saturday January 28, 2023

Personal Planner

Trusts for Surviving Spouse

Trusts for Surviving Spouse

There are three different basic types of trusts for a surviving spouse: a Qualified Terminable Interest Property Trust (QTIP), a Qualified Domestic Trust (QDOT) or a Charitable Remainder Trust (CRT). All three of these trusts may qualify for the marital deduction. However, there are many specific reasons for choosing one of these three trust types.

QTIP Trust


The QTIP trust is the most common marital deduction trust. There are four basic rules for the QTIP trust:
  1. All income must be paid to the surviving spouse.
  2. The surviving spouse may require the trustee to invest in assets that produce income.
  3. The principal may be invaded only for the benefit of the surviving spouse.
  4. The trust remainder will be distributed to the beneficiaries designated under the will or living trust of the first to pass away.
A QTIP trust is excellent for protecting the children of a first marriage. The trust can benefit the surviving spouse and then will be transferred to those children.

Example—Jane Lost Everything but Betty was Protected


Joe and Jane were married and had two children. On Saturday evenings, they often went to dinner with their friends Bill and Betty.

Joe passed away first and had a simple will. He left his estate outright to Jane. It qualified for the estate marital deduction so there was no estate tax.

Subsequently, Jane married John Speculator. John was involved in a Brazilian gold mining venture. The entire estate of Jane was soon invested far south of the border, never to return. Jane and her children lost everything.

Bill and Betty decided to protect their estate. Bill created a QTIP trust for his half of the estate. When Bill passed away, Betty was the beneficiary of the QTIP trust. After a few years, she married Sam Speculator. While Sam was also involved in the Brazilian gold mining adventure, the QTIP trust created by Bill provided income and protection for Betty for her lifetime. In addition, the QTIP trust principal was protected.

QTIP Powers and Election


There are several powers that are permitted for a QTIP trust. First, the required provisions are that the income be paid to the surviving spouse and principal can be invaded only for the surviving spouse. However, the trustee may choose to transfer the greater of 5% of trust assets or $5,000 each year to the surviving spouse. Second, it is permitted to allow the surviving spouse to appoint the remainder. If the surviving spouse holds the power to appoint, he or she can direct the trust to children from the first marriage, but also could give trust assets to other persons.

A QTIP trust must be elected on the Form 706 Federal Estate Tax Return. It is also possible to make a partial QTIP trust election and to create a transfer of the balance that is taxable in the first estate. The benefit of this plan is that this amount will be tax free to family in the second estate.

QDOT Trusts


If a spouse is not a U.S. citizen, then a transfer will not qualify for the federal marital deduction. In this case it is possible to create a qualified domestic trust (QDOT).

With a QDOT, the surviving spouse will receive all income. There must be at least one trustee that is a U.S. citizen or corporation. If the surviving spouse receives distributions of principal, those will be subject to estate tax, with one exception. There is a "hardship" exception that may allow tax-free principal distributions for emergency medical care or other extraordinary circumstances.

If the surviving spouse desires to qualify for the regular marital deduction, he or she may become a U.S. citizen prior to the date for filing the federal Form 706 Estate Tax Return.

Charitable Remainder Trust (CRT)


The third option for a qualified marital deduction trust is a charitable remainder trust. The trust may be created as a two-life agreement during the joint lifetimes of the spouses or it could be created in a will or living trust to benefit the surviving spouse.

There are two different payout options for this CRT. A standard CRT pays 5% or more each year to the surviving spouse. This payout is made from income and, if necessary, from trust principal. An attractive benefit of a CRT is that it may grow tax free during the life of the surviving spouse.

Part of the CRT payments may be distributed at the lower capital gain rates. Finally, because the assets are stepped up to fair market value in the estate, the potential exists to invest in municipal bonds and pay out tax-free income to the spouse.

A second payout method is a net-income-plus-makeup unitrust. This trust method can enable the principal to be invested for growth rather than income. Because the growth inside the trust is tax-free, the surviving spouse may dramatically lower income taxes if he or she does not need the income. Rather than taking the full CRT payout and paying income tax, the spouse permits the trustee to invest for growth for his or her lifetime. If income is needed at a higher level later in life, the trustee may reinvest for income and pay the regular income plus make up the prior shortfall.

With a CRT, after the surviving spouse passes away the remainder is distributed to qualified exempt charities. The charities may be designated by the first spouse to pass away, or a power can be given to the surviving spouse to designate the charities.

Published January 20, 2023

Print
Email
Subsribe to RSS Feed

Previous Articles

Income for Surviving Spouse

How to Fund Your Living Trust

Living Trust - Life and Death Decisions

Your Living Trust Choices

Bequests to Your Favorite Charity

scriptsknown
  • Bequests
    Bequests
    Joe and Anna have been faithful supporters of our organization. They believe it is important to help further our mission.
    More
  • Using a Beneficiary Designation to Make a Gift to Charity
    Using a Beneficiary Designation to Make a Gift to Charity
    Joanne and her late husband Hal had been longtime supporters of our organization. Recently, Joanne's children encouraged...
    More
  • Fixed Income for Retirement
    Fixed Income for Retirement
    After working for decades as a pediatrician in a small town, Patricia is ready to retire.
    More
  • Tax-Free Sale
    Tax-Free Sale
    Howard and Lynn were both age 55 when they purchased some vacant land a few miles outside of town. They thought real estate would be a good investment that could be sold later for a profit.
    More
  • Capital Gains Tax Bypassed
    Capital Gains Tax Bypassed
    Peter and Gail were nearing retirement. Over the years, with the help of their financial advisor, they made solid investments in securities and built a sizable portfolio.
    More
  • Peace of Mind Gift Annuity
    Peace of Mind Gift Annuity
    Many years ago, Clara bought a home. Since she was very pleased with her home, she bought stock in the company that built the home.
    More
  • Endowment Gift
    Endowment Gift
    Pat and Shelly were recently married. They both had been dedicated volunteers at their favorite charity for many years.
    More
  • Sale and Unitrust
    Sale and Unitrust
    Gene and Carol purchased stock in a small medical service company several years ago. The company has done well.
    More
  • The Retirement Unitrust
    The Retirement Unitrust
    Mary grew up on a farm. When her parents passed away, she and her husband Bill inherited the farm.
    More
  • Property Turns Into Income
    Property Turns Into Income
    Miranda lived in the family home where she and her spouse had raised their three children. After her spouse passed away, Miranda found it increasingly difficult to care for her property.
    More
  • Flexible Deferred Gift Annuity
    Flexible Deferred Gift Annuity
    Luis is a 54-year-old executive at a large healthcare company. He purchased company stock during years when the stock price was low, and now the stock has grown substantially in value.
    More
  • Part Gift and Part Sale
    Part Gift and Part Sale
    Susan and Kevin bought a vacant lot along Lake Michigan many years ago. They had planned to build a second home so that their family could spend their summers along the lake.
    More
  • Current Gifts
    Current Gifts
    As is the case with many families, there are times each year when Jim and Sharon focus their attention on gift giving.
    More
  • Gift of a Bank Account When No Longer Needed (POD)
    Gift of a Bank Account When No Longer Needed (POD)
    Keith has been a faithful supporter of The Marfan Foundation and makes regular gifts to support our work.
    More
  • Transferable on Death (TOD) Gifts
    Transferable on Death (TOD) Gifts
    Harold and Jeanne married after meeting at an event The Marfan Foundation held for our donors. They wanted to leave a legacy gift...
    More
  • A Bequest to Further Good Work
    A Bequest to Further Good Work
    Nancy and David were dedicated volunteers. Over the years, they had seen many individuals helped by the good work of their favorite charity.
    More
  • Deferred Gift Annuity
    Deferred Gift Annuity
    Several years ago, Larry and Allison invested $30,000 in what they believed to be an attractive stock.
    More
  • What Will You Do with Your Unspent Retirement Savings?
    What Will You Do with Your Unspent Retirement Savings?
    Michael and Kelly were retired engineers with two adult children. They owned a home, some stocks, and IRAs.
    More
  • Gift Annuity for Real Estate
    Gift Annuity for Real Estate
    Jonathan purchased his home many years ago for $80,000. The home is now worth $420,000. Jonathan wants to sell his home and buy a condo for $130,000.
    More
  • A Bequest to Save Taxes
    A Bequest to Save Taxes
    Thomas was a widower who had a great love for our organization. As an individual who had directly benefited from our work, Thomas wanted to thank us with a gift from his estate.
    More
  • Leading for the Future
    Leading for the Future
    Luke and Cynthia spent many years volunteering and supporting their favorite charity. They wanted to give back in a way that would help fulfill its mission.
    More
  • Give it Twice Trust
    Give it Twice Trust
    While visiting her favorite charity's website, June came across the idea of a give it twice trust. She contacted the charity for more information.
    More
  • Providing for Our Children's Future
    Providing for Our Children's Future
    Ron and Kathy worked for many years building their nest egg for retirement.
    More
  • Bequest of Insurance
    Bequest of Insurance
    Marla and Wayne purchased a life insurance policy many years ago to create security for their children's future.
    More
  • Testamentary Charitable Remainder Unitrust: Have Your Cake and Eat it Too!
    Testamentary Charitable Remainder Unitrust: Have Your Cake and Eat it Too!
    We have all heard the saying "You can't have your cake and eat it too." This phrase describes a situation where we want two good things at the same time when that isn't possible.
    More
  • A Personal Donor Story
    A Personal Donor Story
    "I want the work of the foundation to go forward whether I'm here or not"
    Estate planning is your final statement about the causes you care about
    More