Marital Trusts: How They Work
This post originally appeared on Dummies.com.
Most marriage-oriented trusts postpone payment of estate taxes until both spouses in a marriage have died. A marital deduction trust allows you to put property in trust with your spouse as the beneficiary. Upon your death, your spouse has the right to use the property in the trust.
No matter how valuable the property in the trust is even if it exceeds that year’s federal estate tax exemption amount, your spouse won’t owe any federal estate taxes. When your spouse dies, any leftover amount transfers to the beneficiaries that your spouse determined.
One of the more popular uses for all trusts is to buy time on paying any applicable estate taxes until both spouses have died, or to skip over your spouse for purposes of transferring property but still your spouse the right to income from a trust. QTIP trusts and bypass trusts enable you to tailor your trust arrangements with your personal needs.
How do QTIP trusts compare to marital deduction trusts?
If you die first but want to determine who receives the trust property after your spouse dies, consider using a Qualified Terminable Interest Property trust, commonly known by its acronym as the QTIP trust.A QTIP trust operates much the same as a marital deduction trust, with one important exception: You, not your spouse, specify who receives the remaining property in the trust after your spouse dies.
When should you consider using a marital deduction trust instead of a QTIP, or vice versa? Consider the following: Suppose that you and your spouse were only married once (to each other); you have a happy, contented marriage; and both your children act like they stepped out of a 1950s or early 1960s TV show, such as Ozzie and Harriett or Leave It to Beaver. You both want the other provided for no matter who dies first and want to set up some type of trust to delay or diminish federal estate taxes, but then after the second spouse dies, you both want the remainder to go to your children.
In this case, either a QTIP trust or a marital deduction trust probably works equally as well, because you both agree (at least for now) about how you eventually want to distribute the remaining property in your estates.
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