When an A/B or QTIP Trust may be better than a Disclaimer Trust
This author has discussed the benefits of the Disclaimer Trust over the A/B or QTIP Trust. But what are the benefits of the A/B or QTIP Trust over the Disclaimer Trust?
When the first spouse to die’s assets pass to an irrevocable trust, they may have greater protection from creditors of the Creators than they would have had were they to have passed to a trust which the surviving spouse could revoke and amend without limitation. Irrevocable trusts contain spendthrift provisions which prevent the trust beneficiary from assigning or pledging his or her rights in the trust and which prevent him or her from getting more than the trustee decides to give and these features facilitate creditor protection.
When assets pass to an irrevocable trust when one spouse dies, if properly drafted that trust (unless it is the QTIP Trust where the QTIP election has been made at the first spouse’s death) will not be subject to estate tax at the surviving spouse’s death. But what if the irrevocable trust grows in value between the first spouse’s death and the death of the surviving spouse? That enhanced value (not just the value initially transferred to the trust) will be exempt from estate tax at the surviving spouse’s death.
Some couples have children by prior marriages. The ultimate (remainder) beneficiaries of the irrevocable trust may be the children of the first spouse to die. Therefore, limitations in the irrevocable trust on invasion of principal by the surviving spouse protect those children from attempts by their step-paraent (the surviving spouse) to discriminate against them (and in many cases to discriminate in favor of the children of the surviving spouse).