You found the love of your life, built a life together and have probably weathered your fair share of storms that have made you even stronger.
Life without each other is inconceivable, but the sad reality is that one of you will likely outlive the other. When that day comes, you both want to know that the other is taken care of. That’s why it’s critical to start planning now and to take advantage of the unique protections only available to married individuals. Here are a few of the estate planning strategies available to help you protect and care for each other, even after one of you has passed.
Lifetime QTIP Trust
If you and your spouse individually own unequal amounts of money or property, this type of trust will allow the wealthier spouse to transfer money and property into trust for the benefit of the less wealthy spouse. This is a great alternative to outright gifts to the less wealthy spouse, as that would result in complete loss of control over the money and property and vulnerability to the money or property by the donor spouse’s potential creditors. A Lifetime QTIP Trust is also a helpful strategy for couples in a second or subsequent marriage.
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 in his or her estate, making use of that 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 state law) and the remainder will be excluded from the wealthy spouse’s estate when he or she dies. After both spouses die, the balance of the trust will go to the beneficiaries named by the wealthy spouse when the trust was originally created.
Spousal Lifetime Access Trust (SLAT)
This type of trust allows one spouse to gift money or property into a trust for the benefit of the other spouse, protecting the money and property from creditors and estate tax, while still allowing the gifting spouse the ability to enjoy the money or property through the beneficiary spouse. As opposed to a Lifetime QTIP Trust, this type of trust does not require that the beneficiary spouse be given income distributions but that spouse can be given access to principal during his or her lifetime. The goal of this strategy is to use the gifting spouse’s own estate tax exemption, not the beneficiary spouse’s. Additionally, other beneficiaries, such as children or grandchildren, can be named as current beneficiaries of the trust. An added benefit of this type of trust is that it can be drafted to take into account a potential divorce and remarriage. The trust can refer to the beneficiary as the “current spouse”, so if there is a divorce, the former spouse is no longer entitled to payments, and any new spouse will have access without changing all of the estate planning.
Note: If both spouses desire to use their own exemption during their lifetimes through estate planning, special attention needs to be paid to ensure that reciprocal trusts are not drafted, which could unwind all of the planning. As experienced attorneys, we can help ensure that both spouse’s goals are met in the most tax efficient manner.
With the Tax Cuts and Jobs Act of 2017 (TCJA) doubling the estate tax exemption to $10M adjusted for inflation ($11.58M in 2020), you may feel that you do not need to worry about estate tax reduction strategies. However, this provision will sunset on December 31, 2025, unless Congress takes additional action. If you die in 2026 or after, there is a possibility the estate tax exemption could be back down to $5 million adjusted for inflation. Unfortunately, without a crystal ball, there is no way to know what the exemption amount will be if you die after the sunset. However, portability is a handy tool to have in our belts to help us battle this uncertainty.
Portability allows a surviving spouse to use his or her deceased spouses’ unused exclusion (DSUE) for either gift or estate tax reduction. This means that the surviving spouse has his or her own exclusion plus whatever is left over from their deceased spouse. In order to take advantage of this, however, an estate tax return (Form 706) has to be filed in a timely manner (usually within 9 months, or longer if an extension has been granted) when the first spouse passes. Without this filing, the surviving spouse will only have his or her own exclusion amount to use.
Note: You can only use the DSUE for your most recent deceased spouse. If you remarry, you must use the DSUE from your first spouse before your second spouse dies or else you will lose it.
Davis Law Group is Here to Help
You have worked hard to build a wonderful life for yourself and your family and we are here to help make sure that they are taken care of according to your wishes. Our experienced estate planning attorneys can help you both choose the options that are right for you to that you have peace of mind for each other, for life. Contact us today to set up an in-person or virtual appointment.