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"A/B/C" or "Q-TIP" Trusts

WHOM IS IT FOR?: Married couples with estates that are clearly above the estate tax exemption amount (currently $5 million, but will decrease to $1 million on January 1, 2013 if Congress and the President fail to act).

An A/B/C Trust (sometimes referred to as a "Q-TIP" or "Qualified Terminable Interest Property" Trust) is similar to an A and B Trust in purpose and function. However, an A/B/C Trust is for married couples with estates that are clearly above the estate tax exemption amount.

The benefit of an A/B/C Trust as opposed to an A and B Trust is that the A/B/C Trust not only divides the decedent's assets from the survivor's assets; but further divides the decedent's assets between those with a total value up to the exemption from estate tax and the growth on those assets; and, the decedent's assets over and above the exemption and the growth on them, which will be added to the survivor's estate on the survivor's death for estate tax computation only. So it segregates assets possibly subject to tax on the second spouses death from those that
are not.

Similar to the A and B Trust, on the death of the first spouse, the trust assets are divided so that the survivor's share (generally one-half) is allocated to the survivor's trust (i.e., Trust "A"). The decedent's share is divided into Trust "B" and Trust "C."

One of these trusts receives assets up to the amount of the estate tax exemption. This trust is often referred to as the "Exemption" or "By-Pass" Trust (i.e., Trust "B").

Any amount of the decedent's share above the exemption is funded to the other trust (i.e., usually Trust "C"). This trust is often also referred to as the "Marital Deduction Trust."

On the surviving spouse's death, Trust "A" and the assets of the Marital Deduction Trust (i.e., usually Trust "C") will be subject to estate tax together with the survivor's assets if the total exceeds the exemption amount. The assets of the By-Pass or Exemption Trust (i.e., Trust "B") including the growth thereon, will not be subject to the estate tax on the survivor's death.

After the first spouse's death, Trust "B" and Trust "C" will each usually be required to file their own income tax returns. The net income of these trusts generally is payable to the survivor and passes through to the survivor for income tax purposes. The Bypass or Exemption Trust (and often the Marital Deduction Trust) will have limits/ restrictions on the availability of principal for the survivor.

As you can tell, A/B/C Trusts are much more complex than the Standard Trusts we prepare. However, because of the tax benefits of creating an A/B/C Trust, it is appropriate in certain situations. Consult with an experienced estate planning attorney to determine if an A/B/C Trust is proper in your circumstance.

To view a short video by Long Beach Estate Planning Attorney John T. Anderson on the different types of trusts prepared by The Law Office of John T. Anderson, Click Here.

You can contact our office for more information on estate planning and A/B/C Trusts.

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