If the ultimate goal is flexibility in tax planning for the surviving spouse, your estate plan design may include a survivor’s trust and a family trust.
Survivor’s trust: After the death of a spouse, all assets in the revocable trust will pass into the survivor’s trust. The survivor’s trust is revocable or changeable. The surviving spouse has total control and flexibility with respect to assets in the survivor’s trust. Within nine months of a spouse’s death, the surviving spouse will decide whether to keep assets in the survivor’s trust or move some, all, or none of the assets into a family trust.
Family trust: A family trust is an optional trust that can be used by the surviving spouse to hold some or all assets in an effort to manage state-level estate tax, if applicable. If not needed for that purpose, the surviving spouse does not necessarily need to utilize the family trust. Once it’s set up, the family trust is irrevocable, so the surviving spouse will not be able to change who the beneficiaries are but will be able to utilize the assets during their lifetime. This trust may also provide creditor and remarriage protections for the surviving spouse.
If the ultimate goal of the estate plan is to provide for the surviving spouse and lock in the beneficiaries, an alternative design utilizes a QTIP trust in addition to the survivor’s trust and family trust.
QTIP trust: A QTIP trust is designed to provide for the surviving spouse during his/her lifetime and lock in the future beneficiaries. This trust qualifies for the unlimited marital deduction, allowing the surviving spouse to inherit all of the assets without paying any estate tax upon the death of their spouse.
How a QTIP works: After the death of a spouse, the surviving spouse’s assets flow into a survivor’s trust, and the surviving spouse retains control of those assets. The deceased spouse’s portion of assets flows into a family trust, which is irrevocable and has beneficiaries locked in. Then the trustee can make an election on an estate tax return to move assets from the family trust into a QTIP trust. This decision is often made for tax planning reasons, as it may be more beneficial for income tax or estate tax. The surviving spouse may receive income from the QTIP trust and family trust during their lifetime but cannot change the beneficiaries.