Unlimited Marital Deduction Advantages

Defers estate tax until surviving spouse dies Assuming surviving spouse doesn’t consume assets Assuming surviving spouse doesn’t remarry and leave

assets to charming new spouse May ensure surviving spouse will have sufficient

assets to use applicable estate tax credit ($5,340,000 in 2014) But remember surviving spouse can use “left over”

exemption $3,500,000 Illinois exemption/10% - 16% rate

Spouse will not suffer a reduced standard of living Spouse can receive income from trust assets, even if

not left outright ownership

Unlimited Marital Deduction

Disadvantages “Leave everything to spouse”

Stacks estates Surviving spouse controls disposition of

assets if outright transfer Creditors New charming spouse

Unlimited Marital Deduction

In general, assets transferred to surviving spouse won’t qualify for marital deduction if subject to terminable interest Want to make sure asset included in

estate of surviving spouse

Unlimited Marital Deduction

Exceptions to terminable interest rule Survivorship clauses

Up to six months Common disaster

Spouse must survive

Unlimited Marital Deduction Exceptions to terminable interest rule

If spouse holds power of appointment over assets

Spouse must receive annual income from trust Power of appointment can only be exercised by

surviving spouse Power of appointment will cause assets to be

included in surviving spouse’s estate Charitable Remainder Trusts

Since a charitable remainder, assets wouldn’t have been included in surviving spouses estate anyway

Unlimited Marital Deduction Exceptions to terminable interest rule

QTIP: qualifies for marital deduction Income from assets to surviving spouse for life Assets generally go to children of first to die

spouse on death of second to die spouse Generally assets equal to annual exclusion amount

may go directly to children Implications as amount increases?

2009: $3,500,000 2010: Unlimited 2012: $5,120,000 2014: $5,340,000

Unlimited Marital Deduction

Exceptions to terminable interest rule Executor must make QTIP election

Property subject to QTIP election must be included in surviving spouse’s estate

Executor of surviving spouse’s estate can require QTIP trust to pay transfer tax attributable to QTIP property

Unlimited Marital Deduction

Exceptions to terminable interest rule QTIP

Requirements Surviving spouse must receive income for life No contingencies in right to income Property can not be appointed to anyone other

than surviving spouse Spouse must have authority to demand sale of

non-income producing assets

Unlimited Marital Deduction

Exceptions to terminable interest rule QDOT: Non-citizen spouse

Requirements U.S. trustee

Principal distributions from QDOT subject to estate tax

Sufficient assets left in QDOT to pay estate tax

Bypass Trusts

Useful for estates where second to die estate would exceed annual exclusion amount

In general, for estates this size don’t want to “stack estates”

Bypass Trusts In general, leave

Amount equal to exclusion ($5,340,000 in 2014) amount to bypass trust Could leave directly to beneficiary

No income to spouse Beneficiary (often children) has control Management of property

Excess goes to surviving spouse Spouse can disclaim, if so desires

Implications of changing exclusion amount Give remaindermen power to appoint to

surviving spouse

Bypass Trusts

In general, Spouse gets income for life

Limited power to invade trust assets for ascertainable standard: health, support etc.

Can have power of appointment over > of $5,000 or 5% of trust assets each year

Assets not included in surviving spouse’s estate

Children have remainder interest