Three Important Estate Planning Strategies to Protect Your Spouse By Austin Estate Planning Attorney Zachary D Kamykowski

You have searched for and found the love of your life, maybe your first love, or maybe after a previous marriage. As you have built your life together, you have probably weathered your fair share of storms and grown stronger because of them. To prepare for the future and the possibility of no longer being around for your spouse, it is crucial that you plan now to protect the surviving spouse later. As an Austin estate planning attorney, I help families achieve their life and legacy goals. As part of a married couple, you can further protect your loved one upon your passing through the use of special planning techniques only available to married individuals.

protect your spouse with a Lifetime Qtip trust

If you and your spouse own unequal amounts of money or property, this type of trust will allow the wealthier spouse to transfer money and property into trust for the benefit of the less affluent spouse. This is an excellent alternative to outright gifts to the less wealthy spouse, as that would result in complete loss of control over the money and property and vulnerability to the money or property by the donor spouse’s potential creditors.

A Lifetime QTIP Trust is also a helpful strategy for couples in a second or subsequent marriage. During the less wealthy spouse’s lifetime, they will receive all of the trust income. The trust may also entitle them to receive trust principal for limited purposes.

When the less affluent spouse dies, the executor will include the assets remaining in the trust in the deceased's estate, using that spouse’s otherwise unused federal estate tax exemption. If the less wealthy spouse dies first, the remaining trust property can continue in an asset-protected, lifetime trust for the affluent spouse’s benefit (subject to state law), and the executor will exclude the remainder from the wealthy spouse’s estate when they die. After both spouses die, the trust balance will go to the beneficiaries named by the affluent spouse when the trustmakers created the trust.

spousal lifetime access trust (slat) protects your spouse

This type of trust allows one spouse to gift money or property into a trust for the other spouse’s benefit, protecting the money and property from creditors and estate tax while allowing the gifting spouse to enjoy the money or property through the beneficiary spouse. As opposed to a Lifetime QTIP Trust, this type of trust does not require the distribution of income to the beneficiary spouse, but the trust can give that spouse access to principal during their lifetime.

The goal of this strategy is to use the gifting spouse’s estate tax exemption, not the beneficiary spouse’s. You can name other beneficiaries, such as children or grandchildren, as current trust beneficiaries. An added benefit of this trust is that your attorney can draft it to consider a potential divorce and remarriage. The trust can refer to the beneficiary as the “current spouse,” so if there is a divorce, the former spouse is no longer entitled to payments, and any new spouse will have access without changing all of the estate planning.

• Note: If both spouses desire to use their exemption during their lifetimes through estate planning, you must pay special attention 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.

portability provides protection for your spouse

With the Tax Cuts and Jobs Act of  2017 (TCJA) doubling the estate tax exemption to $10M adjusted for inflation ($12.06M in 2022), 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 the estate tax exemption could be back down to $5 million adjusted for inflation. Unfortunately, without a crystal ball, there is no way to know the exemption amount if you die after the sunset. However, portability is a handy tool in our belts to help us battle this uncertainty.

Portability allows a surviving spouse to use their deceased spouse’s unused exclusion (DSUE) for either gift or estate tax reduction. This means that the surviving spouse has their exclusion plus whatever remains from their deceased spouse. To take advantage of this, however, the executor must file a timely (usually within nine months or longer if the IRS granted an extension) estate tax return (Form 706) when the first spouse passes. Without this filing, the surviving spouse will only have their exclusion amount to use.

• Note: You can only use the DSUE for your most recent deceased spouse. If you remarry, you must use the DSUE from your first spouse before your second spouse dies, or you will lose it.

We are here to help

You have worked hard to build a wonderful life for yourself and your family. I am here to help you develop a plan to protect your spouse and family in the event of your passing according to your wishes. Schedule an appointment so we can discuss ways to help.