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With a credit shelter trust (sometimes called a bypass trust), a donor's will bequeaths to the trust an amount up to the value of the estate tax exemption (currently, $5,250,000). Another common choice married couples can consider is the bypass trust, also known as an AB trust. A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. The Case: The Clayton trust idea stems from a 1992 Federal Court of Appeal case involving a Texas estate. trust is often referred to as a “QTIPable” trust, because the estate tax and income tax basis step up effects of the trust actually depend on whether or not a proper QTIP election is made for the trust at the first spouse’s death. Generally speaking the trust woudl dicate which assets are going to go to a QTIP. A QTIP trust (officially a qualified terminable interest property trust) is a type of trust that allows someone to provide income for their surviving spouse and bequeath property and assets to a different set of beneficiaries. Accordingly, all income of the Clayton QTIP must be paid to the surviving spouse, dating back to the date of the decedent’s death. The donee (recipient) spouse has an income interest in the trust and does not have a power of appointment over the principal. An irrevocable trust is a trust with terms and provisions that cannot be changed or terminated until the purpose of the trust is complete. The bypass trust language can incorporate a limited power of appointment for the surviving spouse so the surviving spouse may appoint the assets amongst a class of beneficiaries (e.g., “the issue of the deceased spouse”). You can get the estate tax benefits of a QTIP trust … One of the new Trusts is usually called an “A Trust” or a “Survivor’s Trust”, and the other is usually called a “B Trust” or a “Deceased’s Bypass Trust” or a “Credit Shelter Trust”. Learn more about … A qualified terminable interest property trust ('QTIP trust') allows a spouse to give a life estate in property to his or her spouse without incurring the federal gift tax. Option 4: … With a bypass trust, there are three separate trusts created upon the death of the first spouse. Bypass Trust to Grandchildren = $1,500,000.00. QTIP Trust to Grandchildren = $2,000,000.00. This option provides more flexibility for A/B trust planning without all the limitations on capital gains tax treatment for Bypass Trust assets when the surviving spouse later dies. All of a trust’s rental income is treated as business income. Over that time the income is spent but the fair market value has doubled to $6 million. When is the Clayton QTIP Election Beneficial? Frequently, the term pre-residuary or residuary is applied to the marital formula. Above, the survivor has made $5,000,000 in GSTT transfers and the decedent spouse made $1,500,000. The remainder of the estate is then passed directly to the spouse tax-free using the unlimited marital estate tax deduction. A grantor trust, IRC §§ 671-78, is ignored for city and county purposes as long as the grantor reports the income of the trust on his or her personal return. Many times the default is "everything" perhaps except for that which is disclaimed or put in a bypass trust based on a formula. Imagine John leaves his wife Jane $3 million in a bypass trust and Jane outlives him 10 years. The family trust, or B trust and a QTIP trust are also created. The “A” trust is sometimes referred to as the marital trust, and the “B” trust is referred to as the bypass trust or the family trust. Mary was the second wife of Arthur who had 4 children from a prior marriage. A marital trust, on the other hand, is similar in that some of the assets are appropriated for the surviving spouse while others remain for the ultimate beneficiaries. The difference is in how the assets are apportioned. One type of trust that is popular with married couples is the credit shelter trust, also known as a bypass trust. Income is apportioned based on business activity within the jurisdiction and not on the location of the trustees. An alternative strategy is the Clayton Election, which is an adaption of the A/B disclaimer where the surviving spouse can keep power over the bypass trust. A trust is a fiduciary relationship in which a trustor gives another party, known as the trustee, the right to hold title to property or assets for the benefit of a third party. The assets qualify for the unlimited marital deduction, which lets all property, regardless of value, pass to a surviving spouse free of estate tax. If you create a QTIP trust, then at your death no estate tax is due on the assets that go into the trust. The bypass trust is generally designed to benefit the surviving spouse for life but not have the bypass trust assets be includible in the taxable estate of the surviving spouse. Winifred dies in 2004 and her $1,500,000 passes to a QTIP Trust for Harvey for life. The trust must be considered valid and legal under state law, which typically means the creation of the trust document must be witnessed and notarized, and … A qualified terminable interest property is an irrevocable trust that enables a grantor to provide for a surviving spouse, and other beneficiaries. 5 Tips for Dividing Trust Assets Between Sub-Trusts in an A-B Trust Dividing the trust assets between the sub-trusts is an important task that requires careful consideration of tax and other consequences. A QTIP trust is a marital trust designed to provide for your spouse after your death while protecting your assets for future generations. Then the Trust assets are divided into two halves and allocated one half to the A Trust and one half to the B Trust. ESTATE OF Arthur M. CLAYTON, Jr., Deceased, Mary Magdalene Clayton and The First National Bank of Lamesa, ... apparently even if the bypass trust is QTIPable in its own right. That trust may contain one or more of the following provisions without subjecting the trust assets to estate and gift tax (i.e., the assets “bypass” the survivor’s estate): (1) the survivor may be entitled to all of the income earned by the trust assets; (2) if the survivor is the sole trustee, he or she may have access to trust … A QTIP trust serves like a “crystal ball” for the uncertainty of the future for married couples. Note that the exemption trust is often referred to as the bypass trust, credit shelter trust and sometimes as the family trust. bypass trust to be considered a QTIP trust for federal tax purposes. The QTIP trust also minimizes the decedent’s estate tax, because the trust assets inherited by the spouse are generally not taxed (this is known as the marital deduction). With the traditional bypass trust, when the first spouse dies, the bypass trust is funded with an amount equal to the applicable exclusion amount in order to minimize federal and state estate taxes. V. Clayton Martial Planning Trusts. • Bypass trusts and do we even need trusts for 99% is being questioned by popular financial press, CFPs, CPAs, and attorneys • Most common “solutions” cited are to ditch the trust altogether, use disclaimer or Clayton QTIP funding, or use an “all marital” approach – all of these have significant issues and flaws – but we can improve With a disclaimer trust all of the decedent’s spouse’s assets pass to their surviving spouse in trust. What is a Bypass or AB Trust? With an AB trust design (aka “bypass” planning), when the first spouse dies, the bypass trust is funded with an amount equal to the applicable exclusion amount in order to minimize federal and state estate taxes. The QTIP trust is exclusively available to spouses, and it is most commonly used by parents who are in second marriages. In order for this technique to apply, the bypass trust must be “QTIPable.” That is, the trust In a typical scenario, a person will use a QTIP trust to provide financial security for their second spouse while ensuring that their children from a prior marriage still stand to inherit the bulk of their estate. Now, combined, husband and wife have, in 2009, a GSTT exemption of $7,000,000.00. Only you and your estate planning attorney can decide if a credit shelter trust is right for your estate plan, but a basic understanding of how … The bypass trust often names the surviving spouse as the sole beneficiary during the surviving spouse's life. The surviving spouse … The assets become the legal property of the trustee* to hold for the beneficiaries. Clayton Election v. Disclaimer Trust: The Clayton election should be compared to another flexible planning approach called a disclaimer trust. 1) No Second “Step Up” in Basis for the Bypass Trust Assets for the Next Generation. How the AB trust/Bypass Trust Structure Works. If you put too much in the Bypass Trust, the kids can have more income tax when they sell the assets after the surviving spouse’s death. If a trust is a Trusts can be arranged in may ways and can specify exactly how and when the assets pass to the beneficiaries. Option 3: Make QTIP Election on Bypass Trust If the terms of the bypass trust contain the key provisions to allow it to qualify as a marital trust, a QTIP election can be made on Form 706 and the assets would get a step-up in basis on the second death. Once the grantor* creates the trust and places property in it, that trust cannot be amended and the property cannot be removed. Contingent QTIP trust - Clayton trust. estate planning for married couples in a world with portability and the marital deduction presented by: melissa j. willms written by: melissa j. willms and mickey r. davis davis & willms, pllc 3555 timmons lane, suite 1250 houston, texas 77027 A Disclaimer Trust is a type of trust that gets set up in a married couple joint revocable trust after the death of the first spouse. or business. In this scenario, the spouse can elect to treat the B Trust as a qualified terminable interest property (QTIP) trust. [9] Mary Clayton was the surviving spouse of Arthur M. Clayton Jr., the decedent. The QTIP trust also offers flexibility to your Executor in maximizing your federal estate tax savings. We can use our same example to illustrate the Clayton QTIP. "50 Such an arbitrary and unsupported misconstruction of the statute cannot be justified by any reasonable reading. 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