Content area
Full Text
Reduction or elimination of estate tax has always been one of the primary goals of estate planning. Several options currently exist for achieving tax savings by taking advantage of the federal unified tax credit and the unlimited federal marital deduction, the Massachusetts unlimited marital deduction which became effective July 1, 1994 and the Massachusetts sponge tax, which takes effect Jan. 1, 1997. These options include:
* The Three-Trust Formula
* The "One Big QTIP" Trust
* The "One Big QTIP" Trust, plus a disclaimer trust
We outlined the basics of the federal and Massachusetts estate tax laws and the use of the Three-Trust Formula in the Summer 1993 issue of Massachusetts CPA Review. This article will specifically focus on the "One Big QTIP" Trust.
The QTIP Trust
A QTIP trust is a "qualified terminable interest property" trust--a special type of trust created by the Internal Revenue Code (2056(b)(7)) and later adopted by Massachusetts, that, if properly drafted, can qualify for the marital deduction for either federal or Massachusetts estate tax purposes. However, a QTIP trust will qualify for the federal and/or Massachusetts marital deductions only if the executor makes the required elections on a timely filed estate tax return (including extensions). The election to qualify QTIP property for the Massachusetts marital deduction is separate and independent from the federal election. The election in both cases is irrevocable once made.
The other requirements of a QTIP trust are (1) the income must be required to be paid to the surviving spouse at least annually and (2) no one during the surviving spouse's lifetime may appoint any part of the trust property to anyone other than the surviving spouse.
The Specifics of Massachusetts Estate Planning
Massachusetts estate tax laws have always been more complicated than estate tax laws in other states. Although this is changing due to the phasing-out of the old Massachusetts estate tax law and the replacement with a "sponge tax" as of Jan. 1, 1997, until that time Massachusetts estate plans must take into account the final stage of the phase-out period in case an individual dies during this period. Until Jan. 1, 1997, we still must consider the interplay of Massachusetts law with the federal system.
The Massachusetts estate tax does not...