12/17/2010 - The income, estate, & gift taxes have been modified for 2010, 2011 & 2012 by the Tax Relief Act of 2010.
Over the past several decades estate tax considerations have motivated many married couples to include in their estate plans the creation and funding of one or two trusts upon the death of one of the spouses to hold that spouse’s estate. The tax purpose of this structure is to avoid estate tax at the first death and to assure that the estate tax exemption of both spouses is preserved and available at the death of the second spouse.
Bypass/Credit Shelter Trusts
There are also potential non-tax benefits of this structure that should not be overlooked, including asset protection. In properly drawn documents, the “bypass” or “credit shelter” trust can qualify as a “spendthrift” or protective trust for the benefit of the surviving spouse if there is an independent trustee, and by funding the bypass trust with assets that could become subject to creditor claims the surviving spouse’s financial exposure to liabilities, such as the cost of extended periods of long-term care can be minimized.
Qualified Terminal Interest (QTIP) Trusts
If the estate of the first spouse to die exceeds the estate tax exemption the will or trust can provide for a second trust, a “qualified terminal interest” (QTIP) trust to hold the excess. It’s called a “qualified” trust because it qualifies for the estate tax marital deduction, so the estate tax result is the same as giving the excess directly to the survivor. A traditional non-tax reason for using such a trust is to assure that on the death of the surviving spouse the remainder of the trust goes to the beneficiaries designated by the first spouse to die, rather than being dissipated or diverted to a new spouse of the survivor, etc. However, much like bypass trusts, QTIP trusts can also provide asset protection if the document is properly written and there is an independent trustee. Also, like the bypass trust, a QTIP trust can hold non-exempt assets to shield them from the surviving spouse’s creditors. It is often desirable and is common practice to have the surviving spouse as trustee of these trusts. In such cases, if the surviving spouse is confronted with creditor problems, he or she could resign in favor of an alternate independent trustee, however, timing of the resignation could be an issue.
2011 Estate Tax Exemption
Because the estate tax exemption increased to $3.5 million in 2009, many married couples have concluded that it is unnecessary to include estate tax planning in their wills or trusts, because their combined estate is less than the amount of a single exemption. However, in 2011 the exemption reverts to just $1,000,000, unless Congress acts.
Regardless of what Congress does or doesn’t do, couples with small estates should consider bypass/QTIP planning as an asset protection strategy, rather than just leaving everything to the survivor to be subject to his or her creditors. Although senior citizens typically have relatively few creditors, the uncertainties of today’s economy and specifically the prospect of extended periods long-term care understandably strikes fear in many.
We suggest everyone review their estate plans to be sure they provide for maximum asset protection.
This brief overview of some important considerations associated with asset protection and bypass/credit shelter trusts is by no means comprehensive. Always seek the advice of a competent professional when making important estate planning and asset protection decisions.