Estate Planning Strategies to Protect Your Spouse

It’s not a pleasant thought, but making sure that your spouse is taken care of and protected after you are gone is the most important aspect of estate planning. While legal marriage does offer some innate protections, it is still important to consider what tools are available to you so that your spouse is provided for. 

Lifetime Qualified Terminable Interest Property Trust

The first such tool that you can use to provide for your spouse is called a lifetime qualified terminable interest property trust (QTIP). A QTIP pays out income to the surviving spouse for life from the trust, with the remainder being distributed according to the grantor upon the surviving spouse’s death. In this way, it ensures that a spouse will be guaranteed consistent income for the remainder of their life. 

A QTIP has several benefits. The biggest is that these income payments qualify for the unlimited marital deduction, which can lead to huge savings on estate taxes. Since the assets are transferred to the spouse in the QTIP, the surviving spouse does not have to pay estate taxes on the assets in the trust. Those taxes will not be due until the surviving spouse’s death, which means the income spent will effectively not be subject to the estate tax. However, if the estate has been well-managed and grows during the spouse’s lifetime, it can actually result in higher payments.

In addition, a QTIP also allows the decedent some control of the distribution of assets after their death. The grantor of the trust can specify which and how many assets will be distributed to their children, grandchildren, and other family members on their spouse’s. This is often an advantage for those in blended families, where a grantor wants to ensure that children from a first marriage or other relationship are taken care of after their spouse dies.

Another major advantage of a QTIP is that it offers protection for the surviving spouse from creditors. While the spouse has access to income from the estate, the bulk of the trust assets remain protected from creditors.

While these may all seem like massive advantages, there are still some downsides to a QTIP. The primary risk is that the trust is irrevocable, meaning if it is set up for a spouse who the decedent ultimately divorces, the trust will remain in effect. The other massive problem is that the surviving spouse will not have access to trust assets and cannot liquidate any of them or transfer them at will. They will only receive the income as provided, but will still be subject to changes in the value of the trust.

Spousal Lifetime Access Trust

Similar to a QTIP, a spousal lifetime access trust (SLAT) is an irrevocable trust made for the benefit of a surviving spouse. The grantor can take advantage of the marital deduction and estate tax exclusion amounts while donating assets to the SLAT, just like a QTIP. And, just like a QTIP, the SLAT can be structured so as to provide for consistent income to the surviving spouse after the grantor’s death. Also similar to a QTIP, the grantor of a SLAT has the ability to designate how certain trust assets will be distributed after the spouse’s death, the structure protects the trust assets from creditors, and this structure excludes the value of the trust assets from the grantor’s estate to lower the tax burden. However, there is one major drawback.

In a SLAT, the grantor actually transfers said assets into the trust and loses control of said assets. That means that, if the grantor and beneficiary spouse ever divorce, the trust assets would remain in the control of the beneficiary. Similarly, if the beneficiary spouse predeceases the grantor, the grantor would lose access to those trust assets, which are distributed in accordance with the trust. Thus, the grantor cannot manage the assets to grow the estate or withdraw any assets should they need any of them during their lifetime.

Other Considerations

While choosing between a QTIP and SLAT can be a difficult decision, there are other matters that can complicate the choice. If the grantor and their spouse live in a community property state, ownership interests must be settled in order for any of these assets to be added to either trust.

Additionally, the surviving spouse may have an opportunity to take advantage of the deceased spouse’s unused exclusion (DSUE). This amount is the unused portion of their deceased spouse’s federal estate and gift tax exclusion. This means that the surviving spouse can combine their own exclusion with what remains of their spouse’s, which increases the amount that the surviving spouse can transfer free of gift and estate tax. 

Choosing the right trust structure for your spouse is a deeply personal decision that depends on your family dynamics, financial goals, and long-term plans. To explore which option best fits your needs, contact Law Stein Anderson to discuss your estate planning in further detail. If you’re considering a neutral third party to help manage trust assets, Trust Experience, Inc. offers professional trustee services to ensure your wishes are carried out with care and expertise.