- An unlimited marital deduction is generally available for transfers of wealth between you and your spouse.
- Made permanent in January 2013, an estate of $5 million (The $5 million amount will be indexed for inflation. Making it $5.25 million in 2013) can be sheltered by a $5 million basic exclusion amount and a tax rate of 40% applies to any excess.
- Any unused portion of the basic exclusion of a deceased spouse is portable and can be transferred to a surviving spouse.
The A, or power of appointment marital, trust
The A trust is structured to qualify for the marital deduction. You give your surviving spouse a right to all of the trust's income for life and the power to appoint who receives the trust property at your spouse's death. You would typically fund the A trust (together with a Q trust, if desired) with the amount of your estate in excess of the applicable exclusion amount.
The B, or bypass credit shelter, trust
You would typically fund the B trust with an amount equal to the applicable exclusion amount, or credit shelter amount. You can give your spouse interests in the B trust, but generally none that would cause the trust to be includable in your spouse's estate for estate tax purposes (thus, the B trust bypasses your spouse's estate). You can name the persons who will receive trust income or other distributions from the trust. You can also provide that, at your spouse's death, the trust will continue for the benefit of, or be distributed to, your children or other beneficiaries. Or, you could give your spouse a limited power to appoint property among a limited class of beneficiaries, such as your children from your current marriage.
The Q, or QTIP marital, trust
The Q trust, typically a QTIP trust, is also structured to qualify for the marital deduction. You give your surviving spouse a right to all of the trust's income for your spouse's life. However, you retain for yourself the right to designate who receives the property at your spouse's death. This can be useful when you have children from a prior marriage who you would like to benefit after your spouse's death. You would typically fund the QTIP trust (together with an A trust, if desired) with the amount of your estate in excess of the applicable exclusion amount.
Everything to spouse versus A/B trusts
Because the exclusion amount higher and portable, some couples may think they do not need A/B or A/B/Q trusts. Everything could be left to the surviving spouse who uses both spouses' exclusions. However, there are still potential tax advantages to using this basic planning strategy as shown in the following example.
Example: John dies in 2013, leaving $10 million to his wife Mary. The transfer qualifies for the marital deduction, no estate tax is due, and John's unused $5 million exclusion is transferred to Mary. A $5.25 million basic exclusion amount that is indexed and portable, and a top estate tax rate of 40%) and that, by the time of Mary's death, the basic exclusion amount has increased to $10 million and the value of Mary's estate has doubled. Mary's estate of $20 million is partially sheltered by her applicable exclusion amount of $15.25 million ($10 million basic exclusion plus John's unused $5.25 million exclusion). After estate taxes of $1,900,000 are paid, $18,100,000 remains for John and Mary's children.
Assume instead that John leaves $5 million to Mary in an A trust and $5 million in a B trust for Mary and their children. No estate tax is due. Mary's basic exclusion amount at the time of her death is $10 million, and that assets have doubled in value. Mary's estate of $10 million is sheltered by her basic exclusion amount of $10 million. No estate tax is due. The entire $20 million (the $10 million B trust plus Mary's $10 million estate) remains for John and Mary's children. By using the A/B trusts, estate tax has been reduced by $1,900,000, and the tax savings go to John and Mary's children.
Other trust benefits
The use of trusts can also provide other benefits, such as control over who receives your property and when, investment management of trust property for trust beneficiaries, avoidance of probate, and asset protection. To learn more, consult an estate planning professional.