Q-Tip Trust

This is another form of marital trust. Q-tip refers to qualified terminal interest property - property that is not given anywhere near outright to the surviving spouse but still qualifies for the marital deduction. If this provision of the law is used the surviving spouse need only get all the income from the trust. He or she need not be given the right to say who gets the trust assets on his or her death, although he or she can be given that right. This is great if you don't want your surviving spouse's second spouse or their kids to get your property.

This type of trust also gives the executor of your estate additional tax saving powers. Your executor is the person you name to establish the validity of your will, collect your assets, pay your bills and distribute the balance as you direct. He or she has the right to elect how much of the trust will be taxable and how much will be tax free due to the marital deduction. The executor may decide to make some of the marital trust taxable in order to equalize the taxable estates of the two spouses and thus reduce the overall tax. This might be done if both are very old and the surviving spouse has a short life expectancy. Two estates of equal value bear a lower total tax than one estate of the combined value because the rate is progressive.

Assume both spouses together have $5 million. Each has $2,500,000 and the estate planning documents for each give $1,500,000 to the kids and the rest ($1,000,000) to the survivor. After the first death the surviving spouse has $2,500,000 of his or her own and the benefit of $1,000,000 in the Q-tip trust. There is also $1,500,000 in the family trust. If the election is made the $1,000,000 in the Q-tip trust will be in the surviving spouse's estate. The surviving spouse' estate 's has $1,000,000 from the Q-Tip and $2,500,000 the survivor already had. The total is $3,500,000. When the survivor dies all goes to the kids. However, $1,500,000 is tax free. This leaves $2,000,000 taxable. The tax on $2, 000,000 is $980.000. Now suppose the Q-tip election is not made. The $1,000,000 in the Q-Tip is taxable on the first death and will not be in the surviving estate. The survivor will have only a $1,000,000 taxable estate. The tax on two $1 million estates (assuming each spouse gives 1,500,000 to the kids) is $820,000. Of course if the second spouse is young the likelihood of deferring the larger tax on the second estate a long time and having the benefit of the extra income on the money which would have otherwise be used to pay tax in the first estate outweighs any savings later. So does the consideration that the estate tax is scheduled to decline.

Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
Ph: 312-782-0844 * Fax: 312-201-1436 * Email: donthompsonlaw@sbcglobal.net