New York Estate Planning & Elder Law Blog
An appellate court recently reversed in part and affirmed in part the judgment of the Court of Appeals concerning a decision by the Comptroller of the Treasury to include the value of a marital trust in an estate in a tax assessment. The trust contained qualified terminable interest property that was reported on the deceased individual’s federal tax return but was excluded from the estate’s Maryland estate tax return. The Court of Special Appeals held that the Comptroller lacked the authority to tax the trust assets as part of the Maryland estate. The appellate court, however, found that after the death of the deceased person’s spouse, the qualified trust assets were transferred on her death and that the transfer of the property was subject to Maryland estate tax.
A marital trust is a particular type of irrevocable trust that is designed to hold a deceased spouse’s assets that are greater than the amount capable of being protected from death taxes. Rather than be taxed at the time of the death of the first spouse to pass away, assets are not taxed until the second spouse dies. As a result, if the second spouse has limited financial means, marital trusts can play an invaluable role.
The Three Types of Marital Trusts
There are actually three types of marital trusts, which include:
- Qualified domestic trusts. If both spouses are United States, there are an unlimited number of transfers permitted between spouses at the time of one’s death. Consequently, the surviving spouse is not required to pay any tax on the estate owned by the first spouse to pass away. If one of the spouses is not a United States citizens, it is possible to create to a qualified domestic trust (QDT) to obtain this level of protection.
- Qualified personal residence trust. By creating a qualified personal residence trust (QPRT), the trust’s creator is able to make gifts that benefit the estate by removing assets and reducing potential estate taxes that will result after the death of the trust’s creator.
- Qualified terminable interest property trust. These trusts are created so that a person has increased asset control. In many cases qualified terminable interest property trusts (QTIPs) are established in combination with living trusts. QTIPs can be used to hold any additional assets that are owned by the couple. Because a QTIP is created at the time of a person’s death, any assets greater than the personal exemption are placed in this trust.
There are both advantages as well as disadvantages to creating a marital trust. As a result, deciding if a marital trust has a place in your estate plan often requires a balancing act. Some of the advantages offered by marital trusts include asset protection and the ability to avoid taxation in some situations. The downside to these trusts is that they are separate tax entities, which can mean a great deal of additional work.
Speak with an Experienced Estate Planning
Estate planning plays a vital role in the lives of many people. Despite this, there are a number of complex factors involved with estate planning. Contact an experienced at Ettinger Estate Planning today to schedule a free initial consultation.