Estate planning can be very simple or very complex depending on your needs, intent, family structure, wealth, and other factors. At Brackin and Johnson we have been preparing Estate Planning documents of all kinds for decades from a simple will to complex trusts. For most families, a simple will along with an Advanced Health Care Directive, Power of Attorney, or simple trust planning is sufficient.
If you are a high wealth or high earning individual, meticulous tax planning is key, although not as many families are affected as in prior years. That's because the new federal tax law doubles the amount of money that's automatically exempt from the federal estate tax to roughly $11 million of an estate for someone who was unmarried, or $22 million if they were married. Of course, these exemptions are indexed over the next several years. The provision remains in effect through the end of 2025, unless Congress extends it.
In our experience dealing with high wealth families, the most common trust tools used to avoid Estate Taxes are Credit Shelter Trusts and particularly the QTIP Trust or Marital Gift Trust - sometimes referred to as a bypass trust. With a credit shelter trust (sometimes called a bypass trust), a donor’s will bequeaths to the trust an amount up to the value of the estate tax exemption. The remainder of the estate is then passed directly to the spouse tax free using the unlimited marital estate tax deduction. The assets placed in the credit shelter trust will remain estate tax free, even in the event the assets increase in value. Further, upon the death of the surviving spouse, the value of the trust assets will not be included in the surviving spouse’s estate because they did not control the distribution or investment of the principal.
A QTIP Trust is a trust created upon the death of a spouse. The assets that are placed in the trust are used for the benefit of the surviving spouse until that spouse passes away. At that point, the ultimate beneficiaries, as established by the original donor, receive the remainder of the trust. Essentially, the surviving spouse is entitled to the income from the trust during their lifetime but the principal is preserved for the donor’s beneficiaries. One key benefit of a QTIP trust is that the estate taxes on the trust assets are deferred until the second spouse dies. Without this tax deferral, the trust’s ultimate beneficiaries would be required to pay estate taxes immediately upon the death of the donor.
QTIP trusts are designed primarily for individuals with multiple marriages who have children from these previous marriages. Under a QTIP trust, the donor is able to take care of their current spouse’s financial needs for the remainder of their life, while at the same time ensuring that their children’s inheritance is secure.
Under a marital gift trust with powers of appointment, the estate is split into two shares. The A share is placed in a trust fund. The B share is gifted directly to the surviving spouse. Again, at this point there is no estate tax assessed against either share. The surviving spouse receives income and, depending upon the terms of the trust documents, also has access to the trust fund’s principal. In many instances, the trust fund documents will give the surviving spouse the power to appoint beneficiaries of the trust upon the death of the surviving spouse. This lack of control over the ultimate beneficiary of the trust fund makes the QTIP trust the more favored credit shelter trust vehicle, especially in cases where one or both spouses have children from a previous marriage. One benefit of a marital gift trust is that, unlike a QTIP trust, the surviving spouse is not required to take distributions of income on an annual basis. Instead, the surviving spouse can leave the principal intact, which may increase the overall value of the trust for all parties.
Other Estate Planning Trusts include but are not limited to the following:
Grantor Retained Trusts / (GRAT / GRUT)
Charitable Remainder Trusts / (CRAT / CRUT)
Charitable Lead Trusts / (CLAT / CLUT)
Qualified Personal Residence Trust (QPRT)
Irrevocable Life Insurance Trust (ILIT)
Qualified Domestic Trust (QDOT)
Intentional Grantor Trust (IGT)
Call or e-mail us today to assist with all of your estate planning needs.