Nonea. Advanced Estate Planning

How to Maintain Control of Your Estate And Keep Your [Second] Spouse Happy

Estate planning for couples in a second or later marriages that have disproportionate estates can be tricky. One solution for allowing the well to do spouse to maintain control of their assets but keep their other half happy is the Lifetime QTIP Trust. 

 The Basics of Creating a Lifetime QTIP Trust

In the estate planning world a “QTIP Trust” is a type of trust that allows a wealthier spouse to transfer an unrestricted amount of assets into trust for the benefit of their less wealthy spouse free from estate and gift taxes.

Typically married couples would make use of a QTIP Trust after death under the “AB Trust” strategy:  After the first spouse dies the “B Trust” holds an amount equal to the federal estate tax exemption (currently $5.43 million in 2015) and the “A Trust” holds the excess. Under this strategy the “A Trust” is in fact a “QTIP Trust” which qualifies for the unlimited marital deduction, meaning that property passing into the trust will not be subject to estate taxes until the surviving spouse dies. 

But what if instead of creating and funding the QTIP Trust after death, the wealthy spouse creates and funds the QTIP Trust for their spouse’s benefit with tax free gifts while the wealthy spouse is alive?  This is the “Lifetime QTIP Trust” which must meet the following criteria to qualify for the unlimited marital deduction:

     1.The trust must be irrevocable.

     2.The trust must be created for the benefit of a spouse who is a U.S. citizen.

     3.The spouse must be entitled to receive all of the net income from the trust at least annually. 

     4. The spouse must have the right to demand that any non-income producing property be  converted into income producing property.

     5. The spouse must be the only one who has the power to appoint trust property

     6. A federal gift tax return must be timely filed.

 Planning With a Lifetime QTIP Trust Offers a Multitude of Benefits

 Outright gifts to your spouse during life or after death lead to total loss of control. If you and your spouse have lopsided estates and families from prior marriages the problem is exacerbated by the difference in your wealth – while the well-to-do spouse will be just fine if the less wealthy spouse dies first, the opposite is not true.  If you and your spouse are in this situation, a Lifetime QTIP Trust offers the following benefits:

  •  The wealthy spouse can create and fund a Lifetime QTIP Trust without using any gift tax exemption.

  •  The generation-skipping transfer tax exemption is not portable, so a Lifetime QTIP Trust can be used to take advantage of the less wealthy spouse’s exemption. This might reduce overall taxes.

  •  During the less wealthy spouse’s lifetime he or she will receive all of the trust income and may be entitled to receive trust principal for limited purposes.

  •  When the less wealthy spouse, dies the assets remaining in the trust will be included his or her estate, thereby making use of the less wealthy spouse’s otherwise unused federal estate tax exemption.

  •  If the less wealthy spouse dies first, the remaining trust property can continue in an asset-protected, lifetime trust for the wealthy spouse’s benefit (subject to applicable state law) and the remainder will be excluded from the wealthy spouse’s estate when he or she dies.

  •  After both you and your spouse die, the balance of the trust will pass to the wealthy spouse’s children and grandchildren or other beneficiaries chosen by the wealthy spouse.

Do You and Your Spouse Need a Lifetime QTIP Trust?

 As with other types of estate planning, Lifetime QTIP Trusts are not “one size fits all” and must be specifically tailored to each couple’s unique family dynamics and financial situation. Please call our firm if you think you and your spouse fit the Lifetime QTIP Trust profile and we will help you determine what will work best for your family.

 If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.


Decanting: How to Fix a Trust That Isn’t Working Out

While many wines get better with age, the same cannot be said for some irrevocable trusts.  Maybe you’re the beneficiary of a trust created by your great grandfather seventy years ago that no longer makes sense.  Or maybe you created an irrevocable trust twenty years ago, that doesn’t work, as it should.  Is there any way to fix an irrevocable trust that has turned from a fine wine into vinegar?  You may be surprised to learn that under certain circumstances the answer is yes, by “decanting” the old broken trust into a brand new one.

 What Does It Mean to “Decant” a Trust?

 Wine lovers know that the term “decant” means to pour wine from one container into another in order to open up the aromas and flavors of the wine.  In the world of irrevocable trusts “decant” means the legal process through which the trustee appoints or distributes trust property in further trust for the benefit of one or more of the beneficiaries.  In other words, the trustee transfers some or all of the property held in an existing trust into a brand new trust with different and more favorable terms.

 When Does It Make Sense to Decant a Trust?

 Decanting a trust makes sense under many different circumstances:

  1. Tweaking the trustee provisions to clarify the person who is allowed to serve as the trustee.

  2. Expanding or limiting the powers of the trustee.

  3. Converting a trust that terminates when a beneficiary reaches a certain age into a lifetime trust.

  4. Changing a support trust into a full discretionary trust in order to protect the trust assets from the beneficiary’s creditors.

  5. Clarifying ambiguous provisions or drafting errors in the existing trust.

  6. Changing the governing law or trust situs to a less taxing or more beneficiary-friendly state.

  7. Adding, modifying or removing powers of appointment for income tax or other reasons.

  8. Merging similar trusts into a single trust for the same beneficiary.

  9. Creating separate trusts from a single trust to address the differing needs of multiple beneficiaries.

  10. Providing for and protecting a special needs beneficiary.

What is the Process for Decanting a Trust?

 First of all, decanting must be allowed under applicable state case law or statutory law.  Aside from this, the trust agreement may contain specific instructions with regard to when or how a trust may be decanted.

 Once it is determined that a trust can and should be decanted, the next step is for the trustee to create the new trust agreement with the desired provisions.  The trustee must then transfer some or all of the property from the existing trust into the new trust.  Any assets remaining in the existing trust will continue to be administered under its terms, otherwise the empty trust will terminate.

 Beware:  Decanting is Not the Only Solution to Fix a Broken Trust

 While decanting may work under certain circumstances, it is not the only way to fix a “broken” irrevocable trust.  Our firm can help you evaluate all of the options available to fix your broken trust and determine which ones will work the best for your situation.

If you want to ensure that your family is cared for, please click here to schedule your complimentary Estate Planning Strategy Call with San Francisco’s premier estate planning attorney, Matthew J. Tuller.