Marital Trusts

Federal tax deductions let all your assets pass to your spouse, who is a U.S. citizen, tax-free. What if you want to relieve your spouse of the burden of managing assets or minimizing estate taxes? What happens upon your spouse's death? Two relatively simple trusts can provide valuable answers to these estate-planning questions.

Qualified Terminable Interest Property Trust (QTIP)

The marital deduction or QTIP trust is designed to provide management and control of assets for a surviving spouse. It is not designed to avoid federal estate taxes upon the death of a surviving spouse.

As with outright gifts to a spouse who is a U.S. citizen, a QTIP trust is designed so that all assets in the trust qualify for the unlimited marital deduction. One purpose of the trust is to avoid estate taxes upon the death of the first spouse. Additionally, the trust can have independent trustee control that can manage the assets for the surviving spouse, and can determine the contingent beneficiaries, who usually are children.

QTIP trusts are frequently used when there are children from a prior marriage, and the parent of those children wants to ensure that a certain portion of his or her estate will pass to them. This cannot always be assumed when the property is left outright to the surviving spouse who would have total control over them. The trust also is used when professional management of the assets is desired for the surviving spouse.

Credit Shelter Trust

A QTIP trust for a spouse cannot shelter the assets from estate tax if they are worth more than the current gift and estate tax exemption. A credit shelter trust (CST), also known as a family trust or bypass trust, may be an option worth considering for its tax benefit.

The primary purpose of the CST is to fully utilize the combined tax credit (exemption equivalent) allowed to each individual. The exemption equivalent amount typically funds the CST while the remaining balance of your estate funds the QTIP trust. Assets in a CST are not included in your spouse's estate, so they pass estate tax-free to beneficiaries after your spouse's death. While your spouse is alive, he or she can enjoy the use of the income earned by the CST assets.

Assets in a CST may be made available to your spouse. The trust can allow for income distributions to your spouse and access to principal for health, education, maintenance and support. At the death of your spouse, the assets in the trust will pass to your named beneficiary tax free. When used together, a QTIP trust and a CST can be powerful estate planning tools.

For more information about trust services or any other service provided by New Covenant Trust Company, please contact Chip Walker at 800-528-4083, ext. 5912 or e-mail at cwalker@newcovenanttrust.com. Contact your tax advisor to determine how these trusts would actually affect your estate.