For decades now estate tax considerations have motivated many married couples to include in their estate plans the creation and funding of one or two trusts upon the death of one of the spouses to hold that spouse’s estate. The tax purpose of this structure is to avoid estate tax at the first death and to assure that the estate tax exemption of both spouses is preserved and available at the death of the second spouse.
Protection From Creditors
There are also potential non-tax benefits of this estate planning tool that should not be overlooked, including asset protection. When properly executed, “bypass” or “credit shelter” trusts can act as a “spendthrift” or protective trust for the benefit of the surviving spouse if there is an independent trustee, and by funding the bypass trust with assets that could become subject to creditor claims the surviving spouse’s financial exposure to liabilities, such as the cost of extended periods of long-term care can be minimized.
Qualified Terminal Interest Property (QTIP) Trusts
If the estate of the first spouse to die exceeds the estate tax exemption the will or trust can provide for a second trust, a “qualified terminal interest property” (QTIP) trust to hold the excess. It’s called a “qualified” trust because it qualifies for the estate tax marital deduction, so the estate tax result is the same as giving the excess directly to the survivor. A traditional non-tax reason for using such a trust is to assure that on the death of the surviving spouse the remainder of the trust goes to the beneficiaries designated by the first spouse to die, rather than being dissipated or diverted to a new spouse of the survivor, etc. However, much like bypass trusts, QTIP trusts can also provide asset protection if the document is properly written and there is an independent trustee. Also, like the bypass trust, a QTIP trust can hold non-exempt assets to shield them from the surviving spouse’s creditors. It is often desirable and is common practice to have the surviving spouse as trustee of these trusts. In such cases, if the surviving spouse is confronted with creditor problems, he or she could resign in favor of an alternate independent trustee, however, timing of the resignation could be an issue.