Married couples can maximize the use of both of their federal exemptions from estate taxes by using AB Trusts as part of their estate plan. The AB Trust system can be set up under the couples’Last Will and Testaments or Revocable Living Trusts. The “A Trust” is also commonly referred to as the “Marital Trust,” “QTIP Trust,” or “Marital Deduction Trust.” The “B Trust” is also commonly referred to as the “Bypass Trust,” “Credit Shelter Trust,” or “Family Trust.”
As the amount that can pass free of estate tax under IRC §2010(c) has increased, bypass trusts created under a marital deduction formula clause have become larger. Most often, the trust’s distribution provisions will provide for the distribution of almost all of the deceased spouse’s property. Thus, it may be desirable for the bypass trust to contain a mixture of provisions. For example, the bypass trust might provide for immediate distribution of gifts of tangible personal property or sums of cash to specified beneficiaries.
The marital trust (sometimes called the “C trust,” “QTIP trust,” or “marital deduction trust”) is generally designed to qualify for the marital deduction and is usually the receptacle for the marital share. Depending on drafting, the marital trust may include only a portion of the marital share and the remaining amount may be given directly to the survivor’s trust (e.g., $100,000 may be given to the marital trust for purposes of making a “reverse QTIP election” if the decedent made lifetime taxable gifts of $100, 000 over the amount of annual exclusion gifts that did not use any GST exemption). The attorney should verify that the marital trust actually qualifies for the marital deduction.
A typical ABC trust provides for specific gifts on the death of the surviving spouse (e.g., $5000 to the gardener), without specifying that such gifts are to come from the survivor’s trust, thus requiring notice to such beneficiaries of any accounting or proceeding concerning the marital trust or credit shelter trust (perhaps causing great embarrassment to the surviving spouse, who perhaps also intended to be able to change the gifts).
Certain transfers of “qualified terminable interest property,” qualify for the marital deduction. The statute defines “qualified terminable interest property” as property: (1) which passes from the decedent, (2) in which the surviving spouse has a qualifying income interest for life, and (3) to which an election under IRC §2056(b)(7)(B) has been made. “Property” is defined as either an entire interest in property or a specific portion of the entire interest.
The term “qualifying income interest for life” with respect to a QTIP trust has the same meaning as with respect to a general power of appointment trust. A QTIP trust qualifies for the marital deduction without providing the surviving spouse with a general power of appointment over the trust. This means that, after death, the testator may control disposition of his or her property while also qualifying a portion of the estate for the marital deduction. The testator may provide the surviving spouse with some discretion over the ultimate distribution of the QTIP trust assets by granting the spouse a power to appoint the trust property among a class of beneficiaries identified by the testator. This power must, however, be exercisable only on or after the surviving spouse’s death. No person may have a power to appoint any of the trust property to any person other than the surviving spouse. Unlike the power over a general power of appointment trust, the power over aQTIP trust may not be held even by a surviving spouse during his or her lifetime. Accordingly, the QTIP trust limits the surviving spouse’s ability to make lifetime gifts of trust assets even to a narrow group of recipients designated by the testator in a limited power of appointment.
Control by the testator is particularly useful when there are children by a former marriage. Even individuals in single marriages may wish to control disposition of their portion of the estate at the surviving spouse’s death or limit it by giving the surviving spouse, at most, a limited testamentary power of appointment. This ensures ultimate distribution of the testator’s assets according to his or her wishes and prevents transfer to others, e.g., the surviving spouse’s new spouse, the surviving spouse’s children by a subsequent marriage.