Lifetime QTIP Trust

Lifetime QTIP Trust
For Couples With Unequal Estates

If a married couple has unequal separate estates, there may be a larger death tax if the "less wealthy spouse" dies first. For example, assume that a husband has a net worth of $1,350,000 and his wife has assets with only very nominal value. Further assume that the husband's will or living trust provides for a QTIP/unified credit trust at his demise. The following table illustrates the problem if his wife dies first.

Order of Death	Amount Which Would Go To The Survivor's or QTIP Trust	Amount Which Would Go To The Unified Credit Trust	Federal Estate Tax at the Death of the Surviving Spouse
If husband dies first	$675,000	$675,000	$0
If wife dies first	$1,350,000	$0	$270,750

This result is caused by not fully using the wife's unified credit-$270,750 will pass to the government for taxes rather than to the children or other beneficiaries. The husband could solve this tax problem by transferring $675,000 of assets to his wife while they are both still living. However, once she has the assets, he loses control over who the ultimate beneficiaries will be; e.g., their children, his children of a prior marriage, her children, a favorite charity, etc.

A possible solution which gives the tax benefit without the loss of control over the ultimate beneficiary is a lifetime QTIP trust.

How It Works
• The husband has a net worth of $1,350,000. He gifts $675,000 to a lifeti ' me QTIP trust (no gift tax because of the unlimited marital deduction). To qualify for "no tax" treatment, a "QTIP election" must be made by the donor. IRC Sec. 2523(f)
• The trustee pays the income to the wife for her lifetime and then to the beneficiaries previously selected by the husband at her later demise.

At the wife's death the trust principal will be included in her estate (IRC Sec. 2044), but her unified credit will offset the tax (assuming her estate has not grown above the amount equivalent to the unified credit 2

1 Assumes death occurs in 2000 or 2001.
2 For 2000 and 2001, $675,000 is the amount of assets protected by an individual's unified credit. The amount of assets protected by the unified credit is termed the "applicable exclusion amount." This amount will change each year, as follows:; $700,000 in 2002 and 2003; $850,000 in 2004; $950,000 in 2005; $1,000,000 in 2006 or thereafter.