QTIP Trust vs.
The bypass trust assets are not included in the surviving spouse's estate, thus minimizing estate taxes. Unlike a QTIP trust, a bypass trust allows the surviving spouse to access the trust's assets, but they do not control where the remaining assets go after their death.
What Is a Qualified Terminable Interest Property (QTIP) Trust? A qualified terminable interest property (QTIP) trust is a legal document that protects an individual's assets on behalf of the surviving spouse while maintaining control over how the assets are distributed once the surviving spouse dies.
Bypass trust (also called an AB trust or a credit shelter trust) is a tool used by well-off married individuals to legally maximize their estate tax exemptions. The strategy involves creating two separate trusts after one spouse passes.
Trusts in general are a useful legal instrument to avoid probate when the grantor of the trust passes on. A marital trust, as well as a QTIP trust, also provides the additional benefit of protecting more assets from federal estate taxes.
What Are the Potential Drawbacks of a QTIP Trust? Limited Access: The surviving spouse generally receives income generated but might have restricted access to the trust's principal, which could be limiting in case of financial difficulties.
A revocable trust can help avoid probate for assets that have been properly transferred into the trust during the grantor's lifetime. This can streamline the distribution of assets and maintain privacy.
A major disadvantage of a bypass trust is the loss of the second income tax basis step up at the death of the surviving spouse for the assets in the bypass trust. When someone dies, the capital basis of the person's assets, with certain exceptions, is adjusted to the fair market value at the person's date of death.
Trusts can be broadly categorized into four main types: Living Trusts, Testamentary Trusts, Revocable Trusts, and Irrevocable Trusts.
If you fail to fund the Bypass trust or do so late, the IRS may assess penalties, taxes, and interest.
The primary reason to use a Q-TIP trust is to: keep your estate from being controlled by your spouse's future spouse.
Jim dies first, leaving Janice a life estate in the assets that are left to the QTIP trust, their house and some investment accounts. She is paid the income the accounts produce, and has the right to live in the house. She can't sell the trust assets, give them away, or leave them to someone else at her death.
However, with a QTIP trust, assets are included in the surviving spouse's taxable estate. That means they can receive a second step-up in basis before passing to beneficiaries after the second spouse dies. This reduces the tax burden on beneficiaries should they choose to sell the assets they receive.
Qualified terminable interest trusts (QTIP trusts) are an estate planning tool used to maximize a couple's applicable exclusion amounts while qualifying for the marital deduction. Full property interest transfers to spouses do not trigger most gift or estate taxes under the marital deduction.
If the spouse dies before the end of the 10 years, the remainder beneficiary continues on the same schedule. To avoid this result, a QTIP trust must instead be structured as a “conduit” trust, meaning that it requires all plan distributions to be distributed to the spouse in the year received by the trust.
Instead of using each other's estate tax exemptions as in a Lifetime QTIP Trust, a Lifetime SLAT uses each spouse's own exemptions. In this case, a spouse would make a gift to a SLAT in order to lower his or her taxable estate.
A bypass trust, also commonly known as a credit shelter trust, is an irrevocable trust designed for couples to minimize estate taxes, protecting assets for beneficiaries while providing for the surviving spouse.
There are many types of trusts, but the revocable living trust is probably the most common and useful for holding title to real estate. The major benefit from holding property in a trust is that the property avoids probate after your death.
A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too.
For the beneficiary of a decedent's estate, the increased basis in inherited assets may result in lesser gain to report and a correspondingly lower income tax to be paid when the assets are ultimately sold. Assets in a bypass trust do not receive a step-up in basis.
Unlike a QTIP trust, the assets of the credit shelter trust are not included in the beneficiary's gross estate and, as a result, are not subject to estate tax at the beneficiary's death (in other words, the assets bypass the beneficiary's estate).
The deceased spouse's Bypass Trust became irrevocable upon the first spouse's death, and the surviving spouse's one-half (½) could still be amended by the surviving spouse during her/his life.
Trusts bypass probate and are less likely to be successfully challenged, which gives your finances and beneficiaries privacy. Wills take effect after your death, so they do not protect your assets if you become incapacitated. Trusts can protect your assets if you are incapacitated while still alive.
One option is to leave your house to someone in your will. A will names the beneficiary for each item of property and transfers ownership after the probate process. A will can be easy to prepare.
A: Property that cannot be held in a trust includes Social Security benefits, health savings and medical savings accounts, and cash. Other types of property that should not go into a trust are individual retirement accounts or 401(k)s, life insurance policies, certain types of bank accounts, and motor vehicles.