How Can Husband Leave Trust for Wife, Then for Sibling?
How can someone, with a house, a rental house and investments altogether worth $4 million, plan for both a stepped-up in basis and the full federal estate tax exemption without allowing those assets into a marital trust. He doesn’t want his wife to have them in case she remarries. He has no children so his one sibling is his sole heir. The wife’s three children will receive an inheritance as well even though she has no assets before the marriage.
There are a few issues here, so let’s unpack them. It’s not clear whether your friend (or you?) wants the surviving wife to receive any benefit from the property. And it sounds like your friend is seeking two step-ups in basis, one upon his death and one upon his subsequent wife’s death. Finally, it doesn’t sound like federal estate taxes should be a concern with the threshold rising to almost $13 million in 2023. Even when these high thresholds sunset for people dying after 2025, it will still be half this amount. It’s not clear how much access to the funds and property your friend would like his wife to have during her life. Depending on the state in which they live, in the absence of a prenuptial agreement to the contrary, she is probably entitled to a share of her husband’s estate. This may be a life interest in a third of the estate or another calculation.
All that said, a so-called “QTIP” trust could be the solution. This would permit the property the husband leaves in trust to be included in the wife’s estate if she survives him and thus receive a step-up in basis upon her death. It allows flexibility in how it is drafted as well as the tax treatment after the husband’s death. And it can be drafted to satisfy any spousal share requirements under state law.
For what it’s worth, QTIP stands for “qualified terminable interest property.”
To qualify as a QTIP trust, the trust must provide that the surviving spouse receive all the income produced by the trust property. Other distributions to the surviving spouse, such as for her health care, are permitted, but not required. QTIP trusts are often used in estate tax planning because of their flexibility. The personal representative of the deceased spouse can choose how much of the trust to include in the surviving spouse’s estate by making an election on the estate tax return. They can even make different elections on the state and federal returns for the same property in order to maximize the potential tax savings.