Oftentimes, people are so focused on tax savings in estate planning that asset protection becomes an afterthought. In my opinion, this is a mistake as I have mentioned previously here. In this post, I will discuss a strategy that accomplishes both asset protection and tax savings: the Clayton QTIP Trust. It is also a flexible structure that allows adjustments on the fly for any changes in the estate tax regime.
Although it may be morbid to say, death is an excellent asset protection opportunity. Because a dead person ( a "decedent") is obviously no longer in need of his assets, death creates a perfect opportunity to set up a non-self-settled trust. A non-self-settled trust is a trust where the settlor isn't also a beneficiary, and such trusts generally offer the most solid asset protection. Another benefit is that non-self-settled trusts aren't subject to the same restrictions on access to assets that self-settled trusts are. We are free to create a structure so that the decedent's wife and children can access assets when they need them, while preventing those assets from being subject to a creditor or a divorcing spouse.
The most obvious way to take advantage of this opportunity would be to create a trust in the decedent's will for the benefit of his spouse and children. These sort of trusts can be set up in variety of ways. One such way is the Clayton QTIP.
In a Clayton QTIP setup, the decedent's will creates a trust where the surviving spouse has certain rights to the trust assets for her life. A trusted person is named in the will as having the right to make a QTIP election over a portion of the assets. The portion over which a QTIP election is made qualifies for the marital deduction, while the remainder makes use of the decedent's New Jersey and/or federal estate tax exclusion. No New Jersey or federal estate tax is paid at the death of the first spouse.
Without such a provision the New Jersey estate tax exclusion of the first spouse could be lost at his death. The Clayton QTIP in essence allows a married couple to have a joint New Jersey estate tax exclusion of $1.35M rather than the standard $675,000. This is important because New Jersey does not allow interspousal "portability" of estate tax exclusion amounts the way that the federal estate tax law does.
The most important feature of such a trust is the flexibility. First, the decision regarding how much of the assets should qualify for the marital deduction doesn't have to be made until after death. In practical terms, this means that your will won't necessarily need to be amended every time the estate tax laws change (which has been often recently). Second, such a trust is flexible enough to have different sets of rules regarding distributions and access for different portions of the assets. This can allow you to give your children more access to certain portions of your assets should you so desire.
The options are almost limitless. We can accommodate almost any of your personal preferences in designing such a trust. Contact me for more details.
TAX ADVICE DISCLAIMER: Any tax advice contained in this communication (including attachments) was not intended or written to be used, and it cannot be used, by you for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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