Using an A-B Trust Arrangement
What if you don't want to give your assets directly to your spouse? You may use a marital trust (sometimes referred to as "Trust A" in an "A-B Plan") to hold assets for the benefit of your spouse and still qualify for the marital deduction.
A marital trust pays all of its income to the surviving spouse. This is a requirement. The spouse may also be entitled to certain amounts of principal upon request. You may even provide the trustee with discretion to make distributions to the surviving spouse as the trustee feels appropriate. There is one other requirement that the marital trust must meet. It must be included in the surviving spouse's gross estate when he or she dies. If the estate of the surviving spouse, including those assets, is large enough, it may be subject to estate taxes, though all federal estate taxes are deferred at the time of the first spouse's death but potentially not eliminated.
QTIP Protection: One special type of marital trust is the QTIP Trust. The QTIP provides a surviving spouse with income from the trust for the spouse's lifetime. However, unlike other marital trusts, once the surviving spouse dies, the remaining trust assets are passed to those beneficiaries named in the first spouse's will. Thus, an individual may provide financial support for a surviving spouse but retain control of, or direct the distribution of, the trust assets after the surviving spouse's death. Upon the death of the surviving spouse, the entire value of the QTIP trust is included in the surviving spouse's gross estate and may be subject to estate taxes.
Credit Shelter Trusts: A Credit Shelter Trust (also referred to as a Family Trust, Bypass Trust, or Trust "B" in an "A-B plan") is a valuable tool that helps married couples minimize unnecessary estate taxes. It does this by ensuring that the applicable exclusion amounts of both spouses are fully utilized but holds all assets available to the surviving spouse for his or her survivor income needs.
Here's How It Works. At death, an individual leaves an amount equal to the estate tax applicable exclusion amount to a credit shelter trust. In 2009, this was equal to $3,500,000. Federal estate taxes are repealed briefly in 2010 and then the exclusion amount reverts back to $1 million in 2011. The estate tax applicable credit amount is applied against the tax from this transfer and thus is exempt from federal estate tax. The trust can be used to provide the surviving spouse with income for life and principal payments if needed to maintain his or her lifestyle. When the surviving spouse dies, the entire value of the trust, including appreciation, is passed to the heirs of the original spouse, federal estate tax-free. Upon death, the estate tax applicable exclusion amount of the surviving spouse is applied to the value of his or her estate, which does not include the assets in the trust. Thus, the maximum tax savings is achieved by ensuring that both applicable exclusion amounts are fully utilized.