Married couples have a unique advantage in estate planning: the unlimited marital deduction. You can leave an infinite amount of money to your U.S. citizen spouse tax-free. However, without proper planning, this simply defers the estate tax problem until the second spouse dies. Enter marital trusts.
The AB Trust (Bypass Trust)
Historically, the AB Trust was the standard for wealthy couples. When the first spouse dies, their assets are split. The 'A' Trust (Survivor's Trust) holds the surviving spouse's share. The 'B' Trust (Bypass or Credit Shelter Trust) holds the deceased spouse's share, up to the estate tax exemption limit.
Important
The Bypass Mechanism
The surviving spouse can receive income from the B Trust, but they don't own the principal. When they die, the B Trust 'bypasses' their taxable estate and goes directly to the children, effectively doubling the couple's estate tax exemption.
The Game Changer: Portability
In 2010, Congress introduced 'portability.' This allows a surviving spouse to inherit the deceased spouse's unused estate tax exemption simply by filing an estate tax return (Form 706). This made the complex AB Trust unnecessary for many couples solely seeking tax avoidance.
The QTIP Trust: Control from the Grave
A Qualified Terminable Interest Property (QTIP) trust is crucial for blended families. It allows you to provide income for your surviving spouse for the rest of their life, but dictates that upon their death, the remaining principal must go to your children from a previous marriage.
Did You Know?
Without a QTIP trust, a surviving spouse in a blended family could legally rewrite their will to leave everything to their own children, completely disinheriting your children.