Estate Planning Strategies to Protect Your Spouse
You found the love of your life, and as you have built your life together, you have likely weathered your fair share of storms and grown stronger because of them. Now that you are married, you are uniquely situated to provide meaningful support for your spouse after your passing through special estate planning tools available only to legally married individuals.
Lifetime Qualified Terminable Interest Property Trust
If one spouse individually owns more money or property than the other, a lifetime qualified terminable interest property (QTIP) trust allows the wealthier spouse (grantor spouse) to transfer money and property into the trust for the benefit of the less wealthy spouse (beneficiary spouse). This alternative is generally better than making outright gifts to a spouse because it may provide some creditor protection. A lifetime QTIP trust can also be a valuable strategy for couples in a second or subsequent marriage. During their lifetime, the beneficiary spouse will receive the income generated by trust assets and may also access trust principal for specific purposes such as healthcare, education, or other needs as defined by the grantor spouse. This structure allows the grantor spouse to provide for their partner during life while ultimately preserving the remaining assets for the grantor spouse’s children from a prior marriage or other chosen beneficiaries.
When the beneficiary spouse dies, the remaining property in the trust is included in their estate, making use of their unused federal estate tax exemption. If the beneficiary spouse dies first, the remaining trust property can continue (subject to applicable state law) for the grantor spouse’s benefit. If the lifetime QTIP trust is properly structured, any remaining trust assets may be excluded from the grantor spouse’s estate upon their death. After both spouses have passed, the remaining trust property is distributed to the beneficiaries designated by the grantor spouse when the trust was originally created.
A lifetime QTIP trust can offer meaningful benefits, but it may have unintended effects if a marriage ends in divorce. Because the trust is irrevocable, the former spouse could remain entitled to income for life unless the trust specifically defines the beneficiary spouse as the current spouse. With thoughtful drafting and the help of an experienced estate planning attorney, you can ensure that the trust reflects your wishes even if life takes an unexpected turn.
Spousal Lifetime Access Trust
A spousal lifetime access trust (SLAT) allows the grantor spouse to gift money or property into a trust for the benefit of the beneficiary spouse, protecting the money and property from creditors and estate tax while still allowing the grantor spouse to enjoy the money or property through the beneficiary spouse. Unlike a lifetime QTIP trust, this type of trust does not require that the beneficiary spouse be given access to the trust’s income. Instead, the beneficiary spouse may be given access to income or principal during their lifetime depending on the grantor spouse’s wishes. The goal of this strategy is to use the grantor spouse’s own estate tax exemption instead of the beneficiary spouse’s. Additionally, other beneficiaries, such as children or grandchildren, can be named as current beneficiaries of the trust.
Similar to lifetime QTIP trusts, SLATs also carry divorce-related risks. If you divorce, the beneficiary spouse retains access to property in the SLAT. However, the grantor spouse likely loses access to the trust upon divorce, as their only connection to the assets was indirectly through the beneficiary spouse. Since the SLAT is irrevocable, there is no way to undo the transfer or reclaim the assets. That is why many people include provisions limiting benefits to a current spouse or add other beneficiaries, such as children, to preserve flexibility.
Note: If both spouses want to use their own exemption during their lifetimes through estate planning tools such as SLATs, special attention needs to be paid to ensure that reciprocal trusts are not drafted, which could unwind all of the planning. As experienced attorneys, we can help ensure that both spouses’ goals are met in the most tax-efficient manner.
Community Property Considerations
If you and your spouse reside in or acquire property in a community property state, it is essential to determine the ownership interests in all property included in your estate plan. If community property is going to fund one of these trusts, it may be necessary to enter into a partition agreement or other marital agreement. Because this step may change the current ownership of the property, it is critical that you work with an experienced attorney who will explain the process and results.
Portability
With the exceptionally high estate tax exemption of $13.99 million per person in 2025, you may feel that you do not need to worry about estate tax reduction strategies. However, this provision will sunset on December 31, 2025, unless Congress takes additional action. If you die in 2026 or after, there is a possibility that the estate tax exemption could be reduced back to $5 million, adjusted for inflation. Unfortunately, without a crystal ball, there is no way to know what the exemption amount will be if you die after the sunset date. However, portability is a handy tool for battling this uncertainty.
Portability allows a surviving spouse to use any unused portion of their deceased spouse’s federal estate and gift tax exclusion—known as the deceased spouse’s unused exclusion (DSUE) amount. 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. However, to take advantage of portability, a federal estate tax return (Form 706) must be timely filed (usually within nine months of the deceased spouse’s death, or longer if an extension has been granted) when the first spouse passes. Without this filing, the surviving spouse will lose the DSUE amount and will have only their own exclusion amount to use.
Note: The DSUE can be used only for your most recently deceased spouse. If you remarry, you must use the first spouse’s DSUE before your new spouse dies—otherwise, you will lose the ability to use the first spouse’s unused exclusion.
MLO Law is Here to Help
You work every day to build a wonderful life for yourself and your family. We are here to help design a unique plan to ensure that you, your spouse, and your family will be taken care of now and upon your passing. Call MLO Law today at 314 932 7111 - schedule an appointment to discuss how we can help.