Paul O. Dillon, Attorney at Law

Can You Keep a Vacation Home in the Family for Generations?

As terrific as it may be to have a family vacation home, the same reasons it’s a wonderful thing can make it one of the most complex assets to pass to future generations. Everything’s great when the parents are alive and well. Still, over time this changes, as explained in a recent article, “Do family vacation homes foster closeness or animosity?" from The Press-Enterprise.

When parents are relatively young and hosting their children and visitors, life at the family vacation home is easy. Everyone knows the routines of the day, who cooks, who cleans, who is in charge of the barbeque, and where the best swimming is. Parents envision their children’s children coming every summer and enjoying the same relaxed bonding experience.

But life changes, especially as generations pass on. Leaving the family vacation home to all children in equal shares in a will or even in a trust could be a prescription for a family disaster. An idyllic place could turn into a family feud.

Who will be in charge of the vacation home? The eldest child, or the one who lives closest to it? Is one child wealthier than the others and more able to shoulder the costs of maintaining a second home? And as grandchildren grow up and have families of their own, deciding who will have access to the house during peak summer weeks can become acrimonious.

Start by having a family conversation to determine if the children (and grandchildren, if appropriate) want the vacation home to remain in the family. Do they all want it, and how do they expect to use it? Are they considering tearing it down and building a larger home, or could it become rental property?

If only one child wants the home, do they want to inherit it instead of receiving any other inheritance? Are there enough assets to equalize the gift? If not, you could give the child who wants the property the right to buy it from the others or your trust upon your death.

If more than one child is interested in the property, you’ll want to talk with an experienced estate planning attorney to plan the property’s future.

Any time more than one person is going to own a property together, they need to have an agreement detailing the rights and obligations of co-ownership. If the decision is made to keep the vacation home in the family, it may be best to leave it in a trust with specific terms for the use of the property, naming a trustee to manage the trust—one or two people, but not everyone in the family. The trust language must address how and when the property can be sold, who will pay for property taxes, utilities, minor and major repairs, and the terms for passing the property through generations.

If the family decides they’d prefer the property to become a rental property to generate income, consider putting it into a Limited Liability Company (LLC). Each of the heirs may have a membership interest in the LLC, one is designated as a manager, and an operating agreement is created to set out the terms for selling or otherwise transferring a membership interest.

An asset as special as a family vacation home needs and deserves planning for the future. Meet with an experienced estate planning attorney to create a plan for the future, then go and enjoy your time with the family.

Reference: The Press-Enterprise (July 2, 2023) “Do family vacation homes foster closeness or animosity?"

Pros and Cons of a Will vs. a Trust

There are many estate planning strategies available for passing your financial legacy across generations, but what works best for one family may only work for some. Some of these estate planning tools work best together, says the recent article, “Which Is Best For Your Estate Plan: A Will Or Trust?” from Forbes. One of the key differences between a will and a trust? Property passed through a will goes through probate, and property owned by a trust avoids probate.

There are pluses and minuses to probate. The best-known disadvantage of probate is its cost and the time it takes to settle matters. Probate requires a complete inventory of the estate’s assets and liabilities to be compiled and submitted along with the will to the court. The court then reviews these documents and allows people to challenge the will. Assets may not be distributed to heirs until the court approves.

There are fees associated with probate; in some states, going through probate can be costly, even if the estate's total value is small. Probate is a streamlined process in other states, making it less expensive and time-consuming. These states reserve the traditional lengthy process of probate for high-value estates. Your estate planning attorney will know the process in your jurisdiction.

Another issue for heirs is the lack of privacy in the probate process. Once the will is filed with the court, it is open to the public. Many celebrity wills are available online. One famous American actor and singer, Bing Crosby, is said to have revised his estate plan by moving most of his assets to living trusts after his first wife died and details of her will became public.

Many wealthy people and celebrities transfer most assets into trusts to avoid publicity. However, the public scrutiny of a will and probate has certain advantages. Probate provides checks and balances. In addition to the court reviewing the details, heirs and potential heirs can see the asset inventory presented to the court and the details of the estate’s distribution. This provides an opportunity to see if assets are missing or if someone seems to have persuaded the decedent to change the terms of a will.

A will is more likely to be challenged than a trust since trust details remain private. The rules for challenging wills are well-established. Some people choose to use a will because it seems easier to change their minds about how they want assets to be distributed. With a trust, you have to name the trust as a legal property owner. This is done by transferring the legal title of the property to the trust. The trust must have legal title to assets to be funded and to work properly.

A revocable or living trust provides for a smoother transition of management and property ownership. The grantor—the person who establishes the trust—serves initially as the trustee and manages the property. Successor trustees named in the agreement automatically take control of the trust if the grantor becomes incapacitated or dies. There is no court involvement.

When a will is used, title to property first passes to your estate and eventually to final beneficiaries. If you become disabled, whoever holds your power of attorney must present it to financial institutions and have the POA accepted before they can manage assets. If there’s no POA in place, the courts will need to be involved in a conservatorship or guardianship proceeding.

Trustee transitions aren’t always smooth, as financial institutions must decide to accept the authority of a successor trustee, which requires a high degree of substantiation before recognizing the trustee’s authority.

Each estate plan needs to be designed for the needs of the individual situation, and all the details must be carefully managed. By working with an experienced estate planning attorney, your family and your legacy will be protected, and your goals for efficiency and privacy can be met.

Reference: Forbes (June 25, 2023) “Which Is Best For Your Estate Plan: A Will Or Trust?”

It Can Take Time to Learn about Inheritances

Often, a distant relative is notified by an estate’s executor or administrator of the death of a relative and any steps to be taken to claim their inheritance. A recent article from yahoo! finance, “How Long Will It Take For My Beneficiaries to Get Notified After Death?” explains how the process works. Every state has its own laws on this topic, but there are some basics you’ll need to know if you’re facing this situation.

Estate and property law are two of the most state-specific sets of laws; in many cases, these laws conflict with those of other states. An experienced estate planning attorney will be able to help figure out what your next steps are. And don’t start spending your inheritance too quickly—a number of things have to happen before your inheritance—if you indeed have one—arrives.

When someone dies, the total amount of their property, cash, assets, and debts is called their “estate.” The court-ordered process of distributing the estate is known as “probate.” If there was a will and an executor was named, the executor is in charge of administrating the estate. If there was no will, the person died intestate, so the court will name an administrator. The chief difference between an executor and an administrator is mainly the title. Both are responsible for paying the estate’s debts and distributing assets to named and legal heirs.

In some states, the executor, heirs, and any interested parties must file for probate within 30 days of the decedent’s death. In other states, you have three years to file for probate. However, in all cases, heirs may not be formally notified of their inheritance until the probate process begins and the executor or administrator starts working on the estate.

Once probate begins, the executor must notify all heirs and potential heirs of their inheritance. If there is a will, the most common rule is for the executor to notify all known and named beneficiaries within 90 days of the start of probate. However, this can also vary from 15 days from the first hearing date to a year or more for notifications.

These rules apply only to known beneficiaries. During probate, the executor may learn of new or unresolved inheritance issues, and then heirs are notified as they are identified.

If the estate has no will, the rules are different. First, the administrator must identify potential beneficiaries based on state law and family records. Sometimes the only source for this information comes from family members who come forward and identify themselves. The administrator is required to make a public notice of the deceased so any unknown heirs have a chance to come forward. The notice usually runs in a local newspaper, and different states have different rules regarding how long it needs to appear in print.

After the heirs have been notified, there is a waiting period for any distributions. This is common, as real estate or other high-value assets may be sold and their value added to the state. If the state requires a waiting period, it’s often six months from when heirs are notified and when they can receive their inheritance. This allows enough time for any interested parties to come forward and contest the inheritance.

An experienced estate planning attorney can help the executor or administrator move through the process of settling the estate.

Reference: yahoo! finance (June 27, 2023) “How Long Will It Take For My Beneficiaries to Get Notified After Death?”

Married Couples can Use Estate Tax Exemptions in Estate Planning

Estate tax avoidance and mitigation are central considerations for financial security for surviving spouses. According to a recent article from The National Law Review, “Basic Estate Tax Planning for Married Couples: Opportunities For Use Of Estate Tax Exemptions,” the first spouse may leave property of unlimited value to the surviving spouse without incurring any estate tax upon the death of the first spouse. This unlimited marital deduction shields assets from estate taxes and helps support the surviving spouse. Assets can be distributed directly to the surviving spouse or through an indirect transfer to a qualifying trust for the surviving spouse’s benefit.

Most couples use trusts for asset protection, most commonly for the preservation of assets for children from a prior marriage and asset management help for the surviving spouse. The marital deduction is a valuable estate tax avoidance tool for married couples.

However, estate tax law is not generous for non-spouse beneficiaries. Legislation passed in 2013 allowed individuals to leave assets totaling $5 million in value (indexed to inflation since 2011) to non-spouse, non-charitable beneficiaries and then doubled this amount following the Tax Cuts and Jobs Act to $10 million. However, if additional legislation is not passed before the sunset date of January 1, 2026, this amount will be cut in half.

In 2013, Congress made the portability of a spouse’s estate tax exemption permanent. This allows the surviving spouse to capture and use the first decedent spouse’s remaining estate tax exemption and the surviving spouse’s own exemption. To capture this estate tax exemption, an estate tax return must be filed in a timely manner after the death of the first spouse.

If spouses have a total estate exceeding available exemptions, they may use what is known as the “Credit Shelter Trust Planning” or “Optimal Marital Deduction Planning.” A trust is established, funded with assets of the first spouse to die, to use the spouse’s estate tax exemption. Assets in the trust are available to the surviving spouse for life but are not included in the survivor’s taxable estate upon their death. The goal benefits the surviving spouse and reduces any estate tax to maximize benefits for the children and grandchildren.

Another frequently used tool is the “disclaimer” plan, which allows the survivor to move certain assets into a trust for the survivor’s benefit rather than receiving assets directly. For married couples with estates valued at less than their available estate tax exemptions, a disclaimer plan provides the “all to spouse” plan and the option to implement a tax-advantaged trust. All assets are left to the survivor; then, based on the value of the first spouse’s estate, the surviving spouse may choose to disclaim the first spouse’s assets and divert them to a tax-advantaged trust.

It must be noted that there is no “one-size-fits-all” plan for married couples who wish to care for their surviving spouse, children, and grandchildren. It’s important to understand the basic estate tax avoidance or mitigation tools to create an estate plan to consider the couple’s planning goals and values. An experienced estate planning attorney can create a comprehensive estate plan to suit each family’s needs.

Reference: The National Law Review (June 24, 2023) “Basic Estate Tax Planning for Married Couples: Opportunities For Use Of Estate Tax Exemptions”

What Is Multigenerational Estate Planning?

Multigenerational planning is common today, where grandparents, parents, and children live in the same home. With more than two generations living in one residence, estate planning issues can arise, as explained in the recent article from Kiplinger, “How to Handle Estate Planning for Multigenerational Living Arrangements.”

For instance, if a grandparent pays for a separate apartment on their child’s property, who owns the apartment? What if an adult child living with elderly parents pays for updates on the property or provides caregiving services to the parents? Should these arrangements lead to unequal inheritances? All of these issues can be addressed through estate planning.

The first issue to address is home ownership. Should the title be taken jointly, as tenants in common, with a life estate, in trust, as a family partnership, or in some other manner? Which family members are allowed to live in the home? And again, how will this arrangement impact inheritances?

For many families, using a trust to detail all aspects of use and ownership is the best solution. The trust document can address everything, including the right of first refusal, language governing who has priority to buy the property upon the death of the parents, equalization language between beneficiaries to account for gifts to certain family members during life, and tax provisions to ensure beneficiaries pay applicable taxes, equally or proportionally.

The trust may also be used to address the incapacity or death of a family member and what will happen to the property for future generations. The level of detail can be extremely important when dealing with multigenerational shared real estate purchases and uses.

For some families, an LLC (Limited Liability Corporation) or LLP (Limited Liability Partnership) allows for easier fractional property ownership. LLCs and LLPs also help with asset protection and maintaining privacy.

An LLC operating agreement specifies which members will be in charge of the daily operation of the property, payment of expenses, and how ownership interests are divided. Intrafamily loans can be leveraged to pay for improvements on the property, and the agreement can be used to address many different scenarios for the family.

If one child provides care for an aging parent, or a grandparent provides regular daycare for working parents, should these arrangements be monetized and factored into the estate plan? What about a sibling who does not live in the home and does not provide any care for elderly parents or young children? There is no one answer for these or the many other situations arising from multigenerational living arrangements.

An experienced estate planning attorney can ensure your estate documents align with your wishes and address these issues. Often, having a professional in the room when mapping out a plan can alleviate some family dynamics, making these matters less emotional.

Reference: Kiplinger (June 29, 2023) “How to Handle Estate Planning for Multigenerational Living Arrangements”

Plan for Expiration of Tax Cuts and Jobs Act

Medium and small businesses who haven’t planned ahead may be in for some brutal financial surprises starting this year as key elements of the Tax Cuts and Jobs Act of 2017 begin to expire, reports a recent article, “Small Business Unprepared For Wallop of 2017 Tax Cut Expiration” from Chief Executive.

The sunsetting of the tax provisions in the law shouldn’t be a surprise. However, many business owners seem unaware of the impact this could have on current and future prospects.

With one exception—a cut in the top rate for the “C Corp” tax rate, from 28% to 21%--everything in the law is being phased out, with the first provisions ending this year. “Bonus depreciation,” the accelerated deducting of the purchase price of certain assets, was 100% for the past five years. It will drop to 80%, with further annual declines of 20% until it’s gone completely.

The qualified business deduction, the section 199A deduction, allows many “flow-though” business owners to reduce their taxable net income up to 20%, with savings commonly amounting to several thousand dollars. In 2025, it ends. However, the loss of this deduction doesn’t just mean a 20% tax hike because the top marginal rate will jump back up to 39.6%, compounded by reversion to the previous bracket structure, which will see many being hit with a higher tax rate on lower incomes. Even the standard deduction will be cut by more than half. These changes will add up to a dramatic tax hit for small business owners.

Estate taxes will also kick in at far lower estate values than current levels, which means business owners will need to do significant estate planning, which can tie up cash and the flexibility businesses often need to maintain growth.

As a result, it’s not just business owners who will feel less prosperous. Many small and mid-sized enterprises currently don’t have sufficient capital to grow their businesses or for unexpected costs or emergencies. With bank and credit markets retrenching after rising interest rates, this isn’t getting better any time soon.

What can business owners do?

Any business that can take advantage of the bonus depreciation law should do so now. In 2023, you can still deduct 80% of the total price of certain capital goods in the first year. If the business planned to make large capital improvements, now is the time.

This is also the time for anyone benefitting from a Qualified Business Income deduction to determine if they have any carryovers which may expire and could be unlocked. It’s also the time to identify ways to accelerate income into years where QBI is still available. Paying tax on 80% of income is better than paying tax on 100% of income.

A conversation with an experienced estate planning attorney to prepare your business and personal life for the coming changes is highly recommended.

Reference: Chief Executive (June 2023) “Small Business Unprepared For Wallop of 2017 Tax Cut Expiration”

Who Pays Taxes, the Estate or Heirs?

If you needed another reason to prepare an estate plan besides saving your family the time and trouble of guessing your wishes for the distribution of property, avoiding litigation among family members and maintaining control of your estate by the family and not the court, perhaps a legacy of leaving heirs an expensive tax bill could get you to make an appointment with an estate planning attorney.

According to a recent article from Forbes, “Heirs Can Be Personally Liable For Estate’s Taxes,” a recent court case involving the estate of the founder of Gulfstream, the aircraft manufacturer, presents an example of why an estate plan and a knowledgeable executor are so important.

The founder died in 2000 in an estate worth about $200 million, primarily held in a living trust. His widow and surviving children were beneficiaries of the estate and trust. Each of them had, at one time or another, acted as a trustee or executor.

The estate tax return was filed, and an election was made to pay the $4.4 million in taxes over 15 years. The estate was able to do this in installments because the main asset of the estate was a business.

The IRS said the estate was worth more than stated on the estate tax return and took the estate to court, where it won the case. The estate now owed an additional $6.7 million in estate taxes, which it also elected to pay over the course of 15 years.

Here’s where things went south. Long before the court decision, the estate was fully distributed to beneficiaries. The estate and trust no longer owned any assets. Several estate tax payments were missed. The IRS sought to collect—from the heirs. The heirs took the matter to court.

A district court sided with the heirs, saying they were not responsible for the estate’s tax obligations. However, a federal appeals court recently reversed the decision. The appeals court ruled that the tax code imposes personal liability for unpaid estate taxes on successor trustees and beneficiaries of a living trust.

The beneficiaries argued they were liable only if they received property from the trust before its creator passed or if they had control of it on the date of death. The court disagreed and said the law places liability on anyone who received or had an interest in the estate’s property, either on the date the estate owner died or at any time after that. The heirs were found personally liable for the unpaid taxes of the estate.

Trustees and estate executors should be extremely cautious about final asset distributions. Great care must be taken in assessing the potential for the IRS or state tax authorities to claim additional estate or income taxes. Until the statute of limitations passes, executors may want to retain enough assets to pay any potential additional taxes, and beneficiaries who receive final distributions from trusts or estates must be aware that they may find themselves personally liable for additional taxes.

Reference: Forbes (June 21, 2023) “Heirs Can Be Personally Liable For Estate’s Taxes”

Completed Gifts to Grantor Trusts Not Eligible for Section 1014 Step-Up

According to the IRS, completed gifts to an irrevocable grantor trust will not receive a basis step-up upon the grantor’s death. Revenue Ruling 2023-2 concludes this is the appropriate result because such property is not acquired from a decedent for purposes of Section 1014(a) of the IRC of 1986 as amended in Section 1014(b) of the Code, as reported by Reuters in the article “IRS confirms that completed gifts to grantor trusts are not eligible for Section 1014 step-up.”

Upon their death, assets received from a decedent are afforded a basis step-up under Code Section 1014. These are assets usually included in the taxable estate for estate tax purposes. However, before the Ruling, many practitioners wondered whether the assets of an irrevocable grantor trust would be eligible for the same benefit.

The irrevocable “grantor trust” is an anomaly under the Code. A “grantor trust” is not recognized as a separate taxpayer for income tax purposes during the lifetime of the creator (usually referred to as the “grantor” or the “settlor”). All income earned during the grantor’s lifetime is reported on the grantor’s individual income tax returns. However, if the grantor trust is irrevocable and if transfers to the trusts are deemed to be completed gifts, then when the grantor dies, the assets of the grantor trust are not included in the taxable estate of the grantor for estate tax purposes. Thus, the grantor trust is deemed to be owned by the grantor for income tax but not estate tax. This led to uncertainty over the eligibility of the grantor trust assets for the Code Section 1014 basis step-up on the grantor’s death.

“Intentionally defective” grantor trusts are widely used, where the grantor is treated as the owner of the grantor trust for income tax purposes and is responsible for paying the income taxes incurred by the trust. The payment by the grantor of the grantor trust’s income taxes effectively lets the grantor make additional tax-free gifts to the grantor trust and increases the grantor trust’s rate of return.

However, since the grantor trust is not a separate taxpayer for income tax purposes, there’s no recognition of gain on the sale or interest income on the note. The interest rate on the note can be the lowest rate which will not cause adverse tax consequences. If the interest sold to the grantor trust grows faster than the applicable interest rate, the excess growth passes, transfer-tax-free, to the grantor trust.

The “Sale Technique” has been used many times since the IRS released Revenue Ruling 83-15, supporting the position that a property sale from a grantor to a grantor trust is not a taxable event. If no gain is recognized on such a sale, the grantor trust takes a carryover basis in the grantor’s property.

With the release of Revenue Ruling 2023-2, how should estate planning attorneys advise their clients? There are a few strategies to consider:

Power to Exchange Assets. Many grantor trusts allow the grantor to substitute trust property for other assets of equivalent value. If a grantor trust has an asset with a low basis, during the grantor’s lifetime, they could exercise the Substitution Power to exchange the low-basis asset for property with a higher basis but of equal value. The low basis asset now becomes part of the grantor’s estate and, as long as the grantor retains it until their death, will be eligible for the Code Section 1014 basis step-up.

Second Sale to Trust. If the trust agreement establishing the grantor trust doesn’t grant Substitution Power, the grantor could purchase low-basis assets from the trust for high-basis assets. The grantor may engage in a series of sales to ensure appreciated stock continues to cycle back to the grantor, so the estate may take advantage of the Code Section 1014 basis step-up.

Granting a General Power of Appointment. In certain situations, it may be possible to grant a testamentary general power of appointment over a grantor trust to a parent or other elderly relative, the “Powerholder.” The grant of a general power of appointment results in the assets subject to such power being includable in the estate of the Powerholder for estate tax purposes. The trust assets in the Powerholder’s estate will then be eligible for the Code Section 1014 basis step-up upon the death of the Powerholder.

The grant of the general power of appointment should not exceed the Powerholder’s available estate tax exemption and only apply to assets with built-in gain. This strategy will require consideration of the Powerholder’s creditors and any possible risks to the grantor trust.

These are complex strategies requiring the help of an experienced estate planning attorney.

Reference: Reuters (June 21, 2023) “IRS confirms that completed gifts to grantor trusts are not eligible for Section 1014 step-up”

What Happens to Digital Assets on Death?

You’ve probably thought about who will inherit your home, your great-grandmother’s jewelry collection and your collection of superhero comics. However, what about your digital assets, asks a recent article from Coast Reporter, “Make sure your estate plan considers your digital assets.”

Digital assets may have significant value. Digital assets include cryptocurrency, non-fungible tokens (NFTs), domain names, digital photos, digital rights to literary content, musical compositions, blog content, online video channels where your content is generating revenue, online gaming, digital online betting accounts, PayPal accounts or even prepaid subscriptions to online content or goods and services.

If your estate plan hasn’t adequately accounted for these assets, your heirs may be unable to access them. Do you and your executor even know what digital assets you own?

Having a list of your digital assets is a start. However, this doesn’t mean your executor can access the assets after your death. Photos and videos stored online may be inaccessible, social media accounts may stay online forever and heirs might not receive money or other assets you intended them to have.

The first hurdle is knowing the passwords for your accounts. Some can be accessed by cybersecurity professionals, like breaking into your phone or a laptop. However, others, like cryptocurrency keys, could be lost forever. Unless you’ve given explicit authorization to someone to access your accounts, they could violate data privacy laws, a criminal offense in most states.

Here’s a game plan for your digital assets and estate plan:

Document digital assets. Know what you own and understand that there’s a difference between owning a digital asset and owning a non-transferable license to use the asset.

Back up your digital assets. Ensure that all online documents, data and assets are backed up to the cloud and store them on a local computer or external hard drive, so your family can access them with fewer obstacles.

Leave digital assets to your spouse. This will avoid the assets being taxed and give the surviving spouse time to plan for the tax liabilities upon their death with an experienced estate planning attorney.

Provide authorization in your will. Update your will so your executor can bypass, reset or recover passwords. If your digital assets are significant enough, talk with your estate planning attorney about having a separate will to deal with digital assets and name an executor knowledgeable about digital assets for the second will.

Check-in regularly. Digital assets are still new for most people, so speak with your estate planning attorney to be sure your wills and powers of attorney reflect any changes in the law or your digital assets.

Reference: Coast Reporter (June 21, 2023) “Make sure your estate plan considers your digital assets”

How Does Portability Work in a Second Marriage Estate Plan?

Despite its advantages, portability isn’t always the solution, even as it’s been used to take the pressure off couples to focus on using as much estate and gift tax exclusion as possible after the first spouse’s death. According to a recent article from Wealth Management, “Portability and Second Marriages,” portability might be a mistake.

The couple and their estate planning attorney need to consider whether leaving the executor with the discretion to use portability is appropriate, and if it is, who the executor should be and how the estate tax burden should be allocated.

The problem with portability in nonstandard families is this: it allows the surviving spouse to use the DSUE (Deceased Spouse’s Unused Exemption) amount personally, instead of requiring it be used for the beneficiaries of the first spouse to die. It’s almost like leaving assets outright to the surviving spouse. In the case of a testate decedent, Treasury regulations provide that only the executor may make the portability elections. The executor should probably not be also a beneficiary and should not be responsible for making the portability election.

Let’s say the estate isn’t large enough to require an estate tax return filing. If the executor is a child from a prior marriage, they may not choose to incur the expense of filing an estate tax return solely to make the portability election for the second spouse. Instead of having the family involved in a disagreement over the need for a return or determining who will pay for its preparation, a better option is to have the estate plan direct whether an estate tax return should be filed to elect portability and if this is done, establish who is responsible for the cost of the preparation and filing.

In complex families with children from a prior marriage, a Qualified Terminable Interest Property (QTIP) trust is used for the surviving spouse, with the trust assets eventually passing to the client’s descendants. However, if the QTIP trust is combined with portability, the estate plan may not operate as intended.

Here’s an example. Ted marries Alba several years after his first wife, Janine dies. Ted has three children from his marriage to Janine. He bequeaths most of his estate to a QTIP trust for Alba and the remainder to his children, naming Alba his executor. At Ted’s death, Alba elects QTIP treatment for the trust and portability. She then makes gifts of her assets to her family using Ted’s DSUE amount. Alba dies with an estate equal to her basic exclusion amount, which she also leaves to her family. The QTIP trust pays estate tax, and Ted’s children receive no benefit from Ted’s exclusion amount.

Even if Alba didn’t make gifts to her family, assuming her estate was large enough to absorb most of her applicable exclusion amount (including the DSUE), the QTIP trust would have to contribute to pay the estate taxes attributed to it unless the estate plan waives reimbursement. Thus, the QTIP trust could bear most or all of the estate tax at the death of the second spouse, while the second spouse’s personal assets are sheltered in part by the deceased spouse’s DSUE amount.

In cases like this, the prudent course of action may be to use traditional credit shelter/marital deduction planning. If there’s a DSUE amount available, the estate plan could direct whether it will be used and how the tax burden on the QTIP trust is handled.

An experienced estate planning attorney will look at the family’s situation holistically and evaluate which strategies are most appropriate to distribute the property per the parent’s wishes to minimize taxes and ensure that the estate plan achieves its goals.

Reference: Wealth Management (June 21, 2023) “Portability and Second Marriages”