The American Tax Relief Act of 2012 provides the option of the “portability” election of a spouse allowing a marital deduction of $5.25 million in 2013 and $5.34 million in 2014. Basically, the concept of “portability” was intended to allow the deceased spouse unused exemption (DSUE) to be transferred to the surviving spouse. On the surface, it sounds like a great answer to a long-time estate planning problem. Unfortunately, under certain circumstances it only renders that estate planning is even more essential. For further details on the portability election, review my “Is Portability Estate Tax Trap?” article.
The most common Marital Trusts are a general power of appointment, a Qualified Terminable Investment Trust (QTIP), Credit Shelter or Bypass Trusts, and an Estate Trust or Residual Trust.
One of the advantages of a Marital Trust is that it allows the heirs to avoid probate and decrease the amount of estate taxes by taking advantage of the unlimited marital deduction without tax consequences.
Of course, upon the surviving spouse’s demise the trust assets remaining are subject to estate taxes. Under most circumstances, a Credit Shelter Trust is created to not only provide asset protection, but to avoid estate taxes when the surviving spouse dies.
WHY DO YOU NEED A MARITAL TRUST?
One of the primary reasons a Marital Trust is created is when there are children from a previous marriage and the wealthier spouse wants to pass all the property to his or her children while at the same time, providing for the surviving spouse. As a result, if the surviving spouse remarries, the assets from the trust will go to the first to die spouse’s children and not to the new spouse.
Depending upon the size of the estate and your estate planning needs, the following trust instruments may still be needed in Florida:
QUALIFIED TERMINABLE INVESTMENT PROPERTY
What differentiates a Qualified Terminable Investment Property (QTIP) is that it is an A/B/C Trust in which there are three (3) trusts generated:
- “Trust A” – QTIP Trust providing asset protection for designated beneficiaries or referred to as a Marital Trust,
- “Trust B” – Credit Shelter Trust for asset protection, and
- “Trust C” – Residual Trust for remaining assets not included in either Trust A or B to allow additional estate tax savings and asset protection.
The QTIP Trust goes into effect upon the death of the first spouse. It is called “Trust A.” Upon the death of the first spouse, assets are moved into the trust and any income generated by the assets is provided to the surviving spouse. In addition, some QTIP Trusts are set up to allow the surviving spouse to receive up to 5% of principal payments.
The QTIP Trust or “Trust A” provides the surviving spouse all the income from the property and upon the death of the surviving spouse, the property is passed to the beneficiaries designated in the trust. This type of trust provides the marital deduction without granting the surviving spouse control over the principal of the trust. Also, there usually is a spendthrift clause added to provide asset protection against creditors.
Upon the death of the surviving spouse, the trust assets go to the designated beneficiaries.
CREDIT SHELTER TRUST OR BY-PASS TRUST
Even though the American Tax Relief Act of 2012 provides tax relief under most circumstances, here are a few reasons that a Creditor Shelter or Bypass Trust may be beneficial:
- Estate tax free appreciation of the assets allocated to the Trust
- Asset protection against estate taxes
- Asset protection against creditors of assets held in the Trust
The Credit Shelter Trust or By-Pass Trust is sometimes referred to as an A/B Trust. The Marital Trust is “Trust A” and the Credit Shelter Trust is “Trust B.” In this case, “Trust B” works as the Residual Trust. Review the Credit Shelter Trust Article to learn more about this type of instrument.
RESIDUAL TRUST
The Residual Trust is created for a few reasons. The following are the most popular purposes for a residual provision in a trust:
- to allow designation of beneficiaries and who is granted certain assets
- the growth of the estate increases beyond the original trust and thereby holds the remaining assets left over
- to cover unexpected circumstances in case one or more beneficiaries do not survive the settlor or grantor
- asset protection to protect against creditors
- asset protection through use of spendthrift provision
Contact Estate Planning Attorney Thomas Upchurch to create your Florida Marital Trust or for any other estate planning instruments at (386) 272-7445 or email him attupchurch@upchurchlaw.com for your free initial consultation.
If you need assistance in Volusia County, Flagler County,Sumter County, Putnam County,Hillsborough County, Miami-Dade County, Broward County, or Palm Beach County contact Attorney Thomas Upchurch at (386) 272-7445 for your free initial consultation. If your county is not listed, assistance may still be provided. Attorney Thomas Upchurch is on Facebook. You may like hisFacebook page.
FULL DISCLOSURE
This article only reflects my personal views in my individual capacity. It does not necessarily represent the views of my law firm and is not sponsored or endorsed by them. The information contained in this article is based solely on opinion, and is provided only for educational purposes and is not intended to provide specific legal advice. No representation is made about the accuracy of the information posted in this article. Articles may or may not be updated and entries may be out-of-date at the time you view them.
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