Spousal Protection Trust Provisions (QTIP)

Benefits to Surviving Spouse

The primary benefit of a QTIP Trust is that it provides for the surviving spouse during their lifetime. The surviving spouse receives income from the trust and, depending on the terms of the trust, may also receive distributions of principal for health, maintenance, and support.

Control Over Asset Distribution

The grantor of the trust (the person who creates the trust) can specify how the assets in the trust will be distributed upon the death of the surviving spouse. This allows the grantor to ensure that the assets ultimately go to beneficiaries of the grantor’s choosing (e.g., children from a previous marriage).

Estate and Gift Tax Benefits

A QTIP Trust allows the grantor to take advantage of the unlimited marital deduction for estate and gift taxes. This means that assets transferred into the trust are not subject to estate taxes until the death of the surviving spouse. This can be particularly useful in situations where the first spouse to die has a larger estate that might otherwise be subject to high estate taxes.

Requirements

For a trust to qualify as a QTIP Trust, certain conditions must be met:

• The surviving spouse must receive all the income from the trust, at least annually, for life.
• No one, including the surviving spouse, can appoint any part of the trust to anyone else during the surviving spouse’s lifetime (i.e., the surviving spouse cannot change the ultimate beneficiaries of the trust).
• The QTIP election, which allows the trust to be treated as qualifying for the marital deduction, must be made by the executor of the estate on the estate tax return.

Flexibility

While the QTIP Trust provides income to the surviving spouse, it can also include provisions for distributions beyond income under certain conditions, such as for health care expenses, living expenses, or other needs.

Final Disposition

Upon the surviving spouse’s death, the assets in the QTIP Trust are included in the surviving spouse’s estate for estate tax purposes. The assets are then distributed according to the terms set by the first spouse to die, providing control over the disposition of the estate’s assets.

A QTIP Trust can be an effective tool in estate planning, especially for couples in second marriages or those who want to ensure that their assets benefit the surviving spouse while still controlling how those assets are ultimately distributed. It’s often advised to work with an estate planning attorney to set up a QTIP Trust to ensure that all legal requirements are met and that the trust operates as intended.

What is a SLAT?

A Spousal Lifetime Access Trust (SLAT) is a type of irrevocable trust designed to provide financial support and asset protection to a spouse while offering significant estate tax benefits for the grantor, or the person creating the trust. When assets are placed into a SLAT, they’re typically removed from the grantor’s taxable estate, which can help reduce the estate tax burden upon their death.

Unlike other trusts, a SLAT allows the grantor’s spouse to be both a beneficiary and access income or principal as specified in the trust agreement, all while shielding the assets from creditors and potential estate taxes.

One notable benefit of a SLAT is its flexibility—it permits a grantor to provide financial security for their spouse and potentially other family members without sacrificing control over their estate plan. However, because SLATs are irrevocable, meaning they cannot be easily modified or revoked once created, careful planning and legal guidance are essential when establishing one.

Benefits of a SLAT

Tax-Freezing 

One of the primary tax advantages of a Spousal Lifetime Access Trust (SLAT) is its ability to “freeze” the value of transferred assets. When assets are moved into a SLAT, they are valued at the time of transfer. This locks in their current worth for estate tax purposes, preventing future growth in value from being subject to estate taxes. Consequently, any appreciation on the assets occurs outside the estate, potentially reducing estate tax exposure on transfers to heirs.

Locking in Current Gift Tax Exemptions

Another significant benefit of a SLAT is its capacity to utilize existing gift tax exemptions. In 2023, each individual has a lifetime exemption of $12.92 million, or $25.84 million for couples, against estate and gift taxes. By establishing a SLAT, couples can make the most of this exemption now, before any possible tax law changes reduce these limits. This strategy allows couples to maximize current exemptions while also maintaining indirect access to the assets through the beneficiary spouse.

Flexibility for Future Needs

SLATs are not only tax-efficient but also flexible. Although the assets are transferred out of the estate, the beneficiary spouse can access trust funds if necessary, providing a balance between estate tax planning and financial security. This combination of tax-freezing, exemption locking, and accessible funds makes SLATs a powerful tool in estate planning.