A trust is an estate planning device created when a grantor surrenders his property to a separate legal entity for the purpose of benefiting select individuals. A trustee named by the grantor holds the trust property in his name for the benefit of the beneficiaries and manages the property according to the trust's terms. A living trust is one established by a living grantor, often with the grantor serving as the first trustee. The rights of the spouse to the trust property when the grantor dies depends on state law and the terms of the trust.
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An A/B trust is typically set up for couples with large estates. An A/B trust is a living trust that splits into two when one spouse dies. The first trust is designed to hold as much of the grantor's property as is sheltered from the federal estate tax by virtue of the unified credit. In IRS terms, a credit is an amount that reduces or eliminates tax; the unified credit is applied to gift and estate tax. For a decedent dying in 2012, up to $5,120,000 can be sheltered in the first trust by the unified credit. The other separate and distinct trust is designed to hold the remainder of the decedent's property, which is sheltered from the federal estate tax by the unlimited marital deduction. A/B trusts are designed to eliminate or reduce the federal estate tax liability of a married couple over the deaths of both spouses.
A Qualified Terminable Interest Property (QTIP) trust is typically used by a remarried grantor who wants to provide for his current spouse but ultimately wishes to leave his property to his children. The QTIP trust makes the surviving spouse the beneficiary of the trust for the remainder of her life; she can use the trust property and its income, but she cannot dispose of the trust's property. When she dies, the first spouse's children become the trust's beneficiaries. A QTIP trust is also used to defer paying estate tax on the trust property.
A pour-over will is a will used in conjunction with a living trust. A grantor may want all his property placed in a trust when he dies, but he might not want to put all his property in trust while he is still alive. A pour-over will is one way for someone to achieve that goal. With a pour-over will, a person creates a living trust and funds it with some of his property. When he dies, his pour-over will transfers whatever specific gifts the grantor wants to make and then places the remaining property in the trust. The pour-over will may contain a provision stating that certain assets should go to the surviving spouse instead of going into the trust.
Spouse's Elective Share
If a deceased spouse leaves nothing or very little to his spouse, the surviving spouse can decline to accept what she is left with and claim the elective share of the estate, typically a larger portion, as defined by the state's probate code. While codes vary, the Uniform Probate Code has influenced most states’ probate laws and has been adopted by 18, making the UPC a good basis for general discussion. Under the UPC, a spouse can claim 50 percent of the marital-property portion of the augmented estate. The augmented estate includes the probate estate plus any property that the decedent surrendered ownership over but still got to control or benefit from, such as a living trust he created. The marital portion is a percentage of the augmented estate based on the number of years the surviving spouse was married to the decedent.
References & Resources
- National Paralegal College: Probate and Uniform Probate Code
- Living Trust Network: Types of Trusts
- Free Dictionary: Pour Over Will
- Free Dictionary: Probate Estate
- University of Pennsylvania Law School: Uniform Probate Code
- Lewis & Clark College of Arts & Sciences: Planned Giving – The QTIP Trust – Benefiting the Blended Family
- Internal Revenue Service: Publication 950 - Introduction to Estate and Gift Taxes