Estate Tax Planning: QTIP Trusts

Do you care what happens to your assets after you die?

I suspect that it is very important to you.  You may want to make sure that your spouse is provided for, or that your children will be the ones that inherit your property.  What you probably do not want is to pay a penny more in estate taxes than you have to.

Everyone's situation is different, and an estate planning tool that may work for someone else may not work for you.  Therefore, it is very important that you work closely with an estate planning attorney and a CPA to come up with a plan that will best fit your needs.

A few months ago we discussed one estate tax planning tool, the portability election.  Today, I am going to go over the basics of the Qualified Terminal Interest Property (QTIP) trust.

What are the goals of a QTIP Trust?

While there are potential estate tax minimization benefits to this type of trust, the primary benefits to making the QTIP election are in maintaining control of the assets after death.  Specifically, it allows you to provide for your spouse during the remainder of his/her life, but ensure that ultimately the assets will go to the beneficiaries that you choose.

Because of this, QTIP trusts are very popular in situations where one spouse has children from a different relationship or where remarriage after the death of the first spouse is likely.

How does the QTIP Trust work?

Under the terms of the QTIP trust, all of the income earned by the assets placed in the trust goes to the surviving spouse.  In addition, most QTIP Trusts allow for the trustee to give the surviving spouse some of the trust principal (the assets) in addition to the income if it serves a specific purpose.  For example, if there is a medical emergency and the surviving spouse does not have enough money to pay for treatment, the trustee may be allowed by the trust to take assets out of the trust to pay the medical bill.

Upon the death of the surviving spouse, all of the trust assets will go to the beneficiaries named by the first to die (the spouse who originally funded the QTIP trust).

What are the estate tax benefits?

The assets placed into a QTIP trust qualify for the unlimited marital estate tax deduction.  This means that they will not be subject to the estate tax at the time of the first spouse to die's death.  However, these assets will be included in the surviving spouse's estate and subject to the estate tax at the surviving spouse's death.  If the portability election is made at the time of the first spouse to die's death, the surviving spouse will be able to use his/her prior deceased spouse's unused exclusion amount in addition to his/her own exclusion.

If you think that the QTIP trust is an estate planning tool that may work for you, I would be happy to refer you to a great estate planning attorney.

I would also be happy to answer estate tax planning questions that you have. Please just send me an e-mail.

As always, please leave your feedback in the comments section below.

Company-Provided Life Insurance

Does your company provide you with life-insurance?

If your employer sponsors a group term-life insurance policy, you can receive up to $50,000 of coverage tax-free.

Any coverage in excess of $50,000 is taxable to the employee, and the taxable amount is based upon an IRS formula.

Your spouse and dependents may also be covered by the group life insurance policy.  Up to $2,000 of coverage is tax-free.  An IRS formula is used to determine the amount of taxable income you will treated as earning for any coverage in excess of the $2,000 amount.

When the life insurance proceeds are eventually paid due to the death of the insurance, the life insurance proceeds are not subject to taxation.  This is even true if the benefits are received before death if the insured is terminally or chronically ill.

Your employer may even take a tax deduction for a portion of the premiums paid as long as the plan does not discriminate between employees and your employer is not a beneficiary under the life insurance contract.

All this sounds great, right?

There are significant limitations for self-employed individuals (which general includes sole proprietors, partners, members of an LLC, and more than 2% S-corporation shareholders).  As a self-employed individual, you are not treated as an employee for these purposes, and therefore you are not allowed to take a business deduction for the life insurance premiums relating to coverage on you or your family.

Also, if the employer owns the life-insurance contract, the business must include the death benefit proceeds paid (to the extent they exceed the premiums paid) in its gross income.  There are 3 exceptions to this:

1. The insured individual was an employee within 12 months before death;
2. The proceeds are paid to buy back an equity interest; or
3. The insured was a highly compensated employee at the time the contract was issued.

If you have questions about employer provided life insurance coverage, please do not hesitate to send me an e-mail.

If you would like a referral to talk to someone licensed to sell life insurance policies, I would be happy to do that as well.

As always, please do not hesitate to leave your feedback in the comments section below.

Estate Tax Planning

Congress radically changed the estate planning landscape in 2010 when it introduced the portability election, and it is time for you to learn how to take advantage of it.

 

Prior to 2010, the estate tax regime ignored the reality that married couples think of themselves as a single economic unit, and instead treated them as individuals.  Every individual was entitled to a basic exclusion amount (an amount of assets the value of which would not be subject to gift or estate taxes) which could be used by transferring their assets to any individual other than to a spouse (transfers to spouses were already excluded through the marital deduction).  This structure placed individuals in the difficult position of deciding how much of their assets to leave to their spouses for their support and well-being, and how much to leave to their children in order to take advantage of the basic exclusion amount.  This was a "use it or lose it" system because any unused portion of the basic exclusion amount would disappear.

 

This all changed in 2010 with the creation of the portability election.  If a valid portability election is made, a spouse may take the unused portion of their last deceased spouse's basic exclusion amount and add it to their own.

 

For example, Jacob and Sarah are a married couple.  Jacob dies in 2013 without having made any taxable gifts in his life, and his will directed his executor to leave his entire estate to his wife and to make the portability election.  This allows Sarah to inherit his $5.25 million basic exclusion and add it to her own basic exclusion.  Sarah would then be able to make gifts of up to $10.5 million in 2013 to her children without having to pay gift or estate taxes.

 

I would encourage you to talk to an estate planning attorney regarding your specific needs and desires.  The portability election is a great estate planning tool, but it should be used in conjunction with a will and trusts in order to ensure that your assets are disposed of in the manner that you want.

 

There are a number of issues relating to the portability election that I have not discussed here.  If you would like to learn more about this election or have any questions, please do not hesitate to send me an e-mail.

 

Also feel free to contact me if you would like a referral to a great estate planning attorney.

 

As always, I appreciate your feedback in the comments section below.