Unlimited Marital Deduction  Advantages Defers estate tax until surviving spouse dies  Assuming surviving spouse doesn’t consume assets  Assuming surviving spouse doesn’t remarry and leave assets to charming new spouse May ensure surviving spouse will have sufficient assets to use applicable estate tax credit ($5,340,000 in 2014)  But remember surviving spouse can use “left over” exemption  $3,500,000 Illinois exemption/10% - 16% rate Spouse will not suffer a reduced standard of living  Spouse can receive income from trust assets, even if not left outright ownership

Unlimited Marital Deduction  Disadvantages “Leave everything to spouse”  Stacks estates Surviving spouse controls disposition of assets if outright transfer  Creditors  New charming spouse

Unlimited Marital Deduction  In general, assets transferred to surviving spouse won’t qualify for marital deduction if subject to terminable interest Want to make sure asset included in estate of surviving spouse

Unlimited Marital Deduction  Exceptions to terminable interest rule Survivorship clauses  Up to six months Common disaster  Spouse must survive

Unlimited Marital Deduction  Exceptions to terminable interest rule If spouse holds power of appointment over assets Spouse must receive annual income from trust Power of appointment can only be exercised by surviving spouse  Power of appointment will cause assets to be included in surviving spouse’s estate Charitable Remainder Trusts  Since a charitable remainder, assets wouldn’t have been included in surviving spouses estate anyway

Unlimited Marital Deduction  Exceptions to terminable interest rule QTIP: qualifies for marital deduction  Income from assets to surviving spouse for life  Assets generally go to children of first to die spouse on death of second to die spouse Generally assets equal to annual exclusion amount may go directly to children  Implications as amount increases? 2009: $3,500, : Unlimited 2012: $5,120, : $5,340,000

Unlimited Marital Deduction  Exceptions to terminable interest rule  Executor must make QTIP election Property subject to QTIP election must be included in surviving spouse’s estate  Executor of surviving spouse’s estate can require QTIP trust to pay transfer tax attributable to QTIP property

Unlimited Marital Deduction  Exceptions to terminable interest rule QTIP  Requirements Surviving spouse must receive income for life No contingencies in right to income Property can not be appointed to anyone other than surviving spouse Spouse must have authority to demand sale of non-income producing assets

Unlimited Marital Deduction  Exceptions to terminable interest rule QDOT: Non-citizen spouse  Requirements U.S. trustee  Principal distributions from QDOT subject to estate tax  Sufficient assets left in QDOT to pay estate tax

Bypass Trusts  Useful for estates where second to die estate would exceed annual exclusion amount  In general, for estates this size don’t want to “stack estates”

Bypass Trusts  In general, leave Amount equal to exclusion ($5,340,000 in 2014) amount to bypass trust  Could leave directly to beneficiary No income to spouse Beneficiary (often children) has control Management of property Excess goes to surviving spouse  Spouse can disclaim, if so desires Implications of changing exclusion amount  Give remaindermen power to appoint to surviving spouse

Bypass Trusts  In general, Spouse gets income for life  Limited power to invade trust assets for ascertainable standard: health, support etc.  Can have power of appointment over > of $5,000 or 5% of trust assets each year  Assets not included in surviving spouse’s estate Children have remainder interest