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Terminal interests: A terminal interest is one that terminates upon the lapse of time or the happening or failure to happen of some event or contingency, if any remaining property passes to a person other than the surviving spouse. If the surviving spouse receives a terminable interest in property; the marital deduction is lost as to that property. The most common terminable interest is an income trust which may qualify for the marital deduction if it qualifies under special rules. The device is frequently used along with a credit shelter trust, which passes property outside of the estate to the children. Since the property in this trust never passes to the surviving spouse, it is not part of his or her estate and passes directly to the children tax free so long as it is within the exemption in the decedent’s estate.
Qualified terminal interests: If the surviving spouse receives a trust allowing income (without limitation) for life and only the power to invade corpus for his or her benefit (the ability to invade for a child or anyone else defeats the qualification), and the decedent irrevocably elects this treatment on the estate tax return, the interest which the surviving receives, although it is a terminal interest never the less qualifies for the marital deduction and passes free of estate tax. Such an interest is called a Qualified Terminal Interest Property (QTIP).
Funding the QTIP: The Qualified Terminable Interest can be a trust, or an annuity such as a joint survivor annuity, or an IRA (but care should be taken to allow the payment in equal installments rather than in a lump sum which would trigger income tax to the trust). If an IRA is used to fund the QTIP, the payments to the survivor may be limited to the minimum annual distributions or may be directly to the surviving spouse outside of any trust. The surviving spouse then rolls the payment into an IRA free of income tax until age 70 1/2 .
Alien spouse: The marital deduction is allowed only if the surviving spouse is an American citizen or becomes one before the estate tax return is due (within 9 months from the date of death plus an additional 6 months on extension) and was a U.S. resident from the date of the decedent’s death, or unless the decedent leaves the bequest to the surviving spouse through a qualified domestic trust (QDOT). If a trust to the surviving spouse would otherwise qualify for the marital deduction it may be reformed to meet the special requirements for the QDOT. The QDOT or reformed spousal trust may be created by the decedent, the executor or the surviving spouse. The QDOT election must be irrevocably elected on the estate tax return. The surviving spouses assignment to a QDOT must be made before the estate tax filing date, and the transfer must be completed before the estate is closed.
To make sure that you are protected, it is crucial that you contact skilled and experienced Attorney C. Stephen Gurdin Jr. a Pennsylvania Estate Planning lawyer.
Call Attorney C. Stephen Gurdin Jr. at, 570.826.0481
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