Trusts appropriate for a married couple

Simple “Couple” Trust
In a “simple” form of living trust, a married couple jointly shares control and benefits during their lifetime. At the death of the first spouse (the “deceased spouse”), the surviving spouse retains complete control over the trust and can even change the beneficiaries. At the surviving spouse’s death, the assets are distributed to the beneficiaries without probate, provided the assets are kept in the living trust during the surviving spouse’s lifetime. This is the easiest type of trust because no additional income tax return is required and because the surviving spouse can manage the trust as she sees fit. At the surviving spouse’s death, there will be estate taxes if the size of the surviving spouse’s estate (living trust, plus any other assets owned by the surviving spouse, including life insurance and retirement accounts) is greater than the amount excluded from estate taxes ( the “applicable exclusion amount”) in the year of the surviving spouse’s death.

A/B Trust
An A/B Trust is administered identically to a “simple” living trust while both spouses are alive. Unlike the simple trust, when the deceased spouse dies, the A/B Trust divides the couple's estate into two trusts. The B Trust (known as the “Bypass Trust”) is equal to the lesser of (i) applicable exclusion amount or (ii) the deceased spouse’s separate property plus half of the couple’s community property. The A Trust (known as the "Survivor's Trust") contains the balance of the couple's assets.

The couple’s trust is divided into two at the deceased spouse’s death so that each spouse's applicable exclusion amount is used. This effectively doubles the amount that can pass to the couple's heirs without estate tax. The surviving spouse may use the funds in the Survivor's Trust without restrictions, and is often also the Trustee and sole beneficiary of the Bypass Trust during her lifetime. At the surviving spouse’s death, the Bypass Trust will pass to the couple’s heirs free of estate taxes. The Survivor’s Trust will only be subject to estate taxes if the surviving spouse's assets are greater than the applicable exclusion amount in the year of the survivor's death.

A/B/QTIP
If a couple is extremely wealthy and establishes an A/B Trust, then at the death of the deceased spouse, the applicable exclusion amount will be held in the Bypass Trust, but the balance of the couple’s estate will be held exclusively by the surviving spouse in the Survivor’s Trust. In 2007, in an estate of $10 million, $2 million would be held in the Bypass Trust and $8 million in the Survivor’s Trust.

If the surviving spouse remarries, begins to support a new charity, or gets into an argument with one of the couple’s children, the surviving spouse can amend the entire Survivor’s Trust and completely change the beneficiaries. Only the amounts left in the Bypass Trust will be distributed to the persons the deceased spouse intended to benefit.
The A/B/QTIP Trust provides the same tax benefits as an A/B Trust by placing the deceased spouse’s applicable exclusion amount into a separate Bypass Trust. However, the balance of the deceased spouse's assets are deposited in a third trust (the “QTIP Trust”), rather than distributed to the Survivor’s Trust. That way, each spouse has control over half of their assets, and the benefits are not lopsided in favor of the heirs of the surviving spouse.

The surviving spouse is often the Trustee and must be the only beneficiary of the new QTIP Trust. If the couple has children from earlier marriages or do not agree on the distributions to their ultimate beneficiaries, the A/B/QTIP Trust is preferable to the simpler A/B Trust option. In the A/B/QTIP Trust, regardless of the size of the couple’s estate, the husband may leave his estate to one group of heirs after the death of the surviving spouse and the wife may leave her estate to other heirs. Both spouses can feel confident in their estate plan.

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