Trust Estate Plan for Typical Married Couple

In a typical estate plan for a married couples historically including funding a credit shelter or bypass trust to benefit the surviving spouse while keeping those assets outside the surviving spouse’s estate. The reasons for this common or default estate plan was to assure financial security for the surviving spouse but using the benefit of the first to die spouse’s estate tax exemption. Then the law changed and a deceased spouse could port or transfer their unused exemption to the surviving spouse. Under that new regime it is more common to create first a marital or QTIP trust for the surviving spouse. That facilitates preserving the generation skipping transfer (GST) tax exemption and asset protection for the surviving spouse. In many situations this approach became the default plan for married couples because assets in a QTIP, in contrast to assets in a credit shelter trust, get a basis step up (capital gains are eliminated) on the death of the second spouse. When a QTIP marital trust approach is used consideration should be given to incorporating a mechanism so that the surviving spouse can disclaim (renounce) any portion of the QTIP trust up to the exemption amount and provide that amount would pass to a credit shelter trust. That provides flexibility if the first to die spouse faces a state estate tax with a lower exemption amount, or if the federal estate tax rules change. Another approach, but it is more costly and complicated, is to give an independent person the power to determine how much of the QTIP trust should be qualified for the marital deduction, with the difference then passing to the credit shelter trust.