People establish trusts at death for a variety of reasons:
- To avoid the unnecessary payment of estate taxes
- To arrange for professional financial management for children or spouses, who may have little or no experience
- To care first for a surviving spouse, then pass any remaining assets to other heirs, e.g., children from a prior marriage
Two trusts frequently used in tandem by a husband and wife are the Credit Shelter trust and the Marital Deduction trust.
Credit Shelter Trust (often called a Family, By-Pass or Residual Trust):
Named for the federal estate and gift tax credit. It is, perhaps, the most commonly used irrevocable trust. Married couples employ it to lower the federal death taxes ultimately paid by their children or other heirs. The trust is established at the death of the first spouse and generally continues for the benefit of the surviving spouse and/or the children. It effectively transfers assets to the children at the second death with tax savings of as much as $550,000 or more.
Funding is normally limited to that amount which can be protected from federal estate tax. In 2005, funding is limited to approximately $1,500,000. That amount is scheduled to increase in increments to $3,500,000 by the year 2009. While the federal estate tax is slated to be repealed in 2010, current law reinstates it in 2011, rolling back the exemption equivalent amount to $1,000,000. Careful planning and frequent reviews have never been more important!
Assets in the deceased spouse's estate exceeding the amounts stated above are normally transferred directly to the surviving spouse or, alternatively, to one of the marital trusts described below.
Marital Deduction Trusts (lifetime benefits for the Surviving Spouse):
Generally used in tandem with the Credit Shelter Trust, the marital trust comes in two primary types. One is revocable serving simply as a private management aid to the survivor. The second is irrevocable, the QTIP (Qualified Terminable Interest Property) trust; at the survivor's death, the trust assets usually pass to those heirs named by the first spouse to have died. The QTIP variety is frequently used in cases where there are children from a prior marriage.
So long as the surviving spouse is alive, amounts paid from a marital trust can only benefit the surviving spouse.
Consultation with your estate attorney and financial advisors will help you identify the types of trusts and trust provisions most beneficial to your particular situation.