Protecting Your Family And Your Future For Over 20 Years

What The Surviving Spouse Should Know

When a couple has a marital trust there are certain acts of administration that must be done and actions to avoid when one spouse dies. Whether or not these actions are taken can mean the difference in substantial estate tax savings. Also, avoiding certain actions pertaining to inheritances can prevent a gift tax from being assessed. In this article I offer information that can help you avoid these taxes.

Funding the Disclaimer Trust

When a couple has a marital trust which has provisions for a Disclaimer Trust to receive assets upon the first death, the survivor of the couple must make the decision whether to transfer assets to the Disclaimer Trust within 9 months of the death. Additionally, the transfer by way of change of title must be done within 9 months of the death. (So, for example, certain assets would change title from The Smith Family Trust to the Smith Family Trust – Disclaimer Trust with the survivor likely acting as trustee.) The reason the survivor would fund the Disclaimer Trust is to save on estate taxes as in situations where the total value of the couple’s estate is above the amount of one exemption from federal estate tax. This is important to accomplish within the time allowed. If the transfers are done beyond the time limit; the surviving spouse will most likely lose the right to use their deceased’s spouse’s exemption from estate taxes to pass on part of their estate resulting in substantial estate taxes to their heirs. Marital trusts may also contain mandatory provisions for the funding of sub trusts upon death of a spouse with trusts to be funded such as: Survivor’s Trust, Bypass Trust, and QTIP Trust. The surviving spouse should be aware that these trusts must be funded (assets retitled in the names of those trusts upon the first death) at that time.

Gifts from QTIP

Trusts Resulting in Gift Tax. Some marital trusts have provisions for qualified terminable interest property to be held in trust called a QTIP Trust which is funded upon the death of the first spouse to die. Assets held in a QTIP Trust are required to pay out their income to the surviving spouse during his or her lifetime and avoid estate and gift tax during the surviving spouse’s lifetime. That is unless the surviving spouse wishes to gift or sell an asset held in the QTIP Trust. Tax law provides that a transfer of any portion of an income interest in property held in a QTIP is deemed to be a transfer of all interests in property held in the QTIP for gift tax purposes even without transfer of the whole. The result is that the transfer of even a small part of the property held in a QTIP subjects the entirety of the holding of a QTIP to immediate gift tax liability.

This also occurs if the IRS determines that a part of the property held in a QTIP was sold for less than fair market value.

Examples: Husband leaves wife an apartment complex in a QTIP trust. Wife is the trustee and receives rental income from the property. The wife decides to allow her daughter and family a one-half interest in the apartment complex to help support her family. This is in violation of IRC 2519 which will cause a gift tax to be assessed on the value of the entire apartment complex for which wife will be responsible.

Or, the wife decides to sell the entire apartment complex because she wants to invest in another income property. If the IRS finds the sale was made for less than fair market value, this will also constitute a violation of IRC 2519 with the same result as above.

Portable Estate Tax Exemptions

A spouse may use a deceased spouse’s unused exemption from federal estate tax if proper procedure is followed.

In order to do so, the surviving spouse must file an estate tax return. The return is Form 706 and must be timely filed. (Consult an estate planning attorney or CPA.) This is an important provision pertaining to estate taxes of which all should be aware.

When a spouse dies, the survivor must deal with emotions and stress. It is not the time to be determining what needs to be done from a legal standpoint. If you are not clear what actions the terms of your estate plan requires in order to take advantage of tax saving or prevention of gift taxes after the death of a spouse, schedule a trust review to get explanations.