Charity to the Rescue for Blended Families
Brides and grooms in second marriages often face the dual goals of providing for a surviving spouse while still having assets eventually pass to children from a first marriage or to a favorite charity. The QTIP trust allows a husband or wife to reserve all the income — along with some invasion of principal — for the survivor, knowing that, at the survivor’s death, assets can pass to the children of the first spouse to die [Code §2056(b)(7)]. The QTIP can also be used to pass assets to charity at the surviving spouse’s death. The entire value of the trust qualifies for the marital deduction in the estate of the first spouse to die (assuming the first spouse’s estate is subject to tax), and at the surviving spouse’s death, the value is included in his or her gross estate. If charity is the remainder beneficiary, the charitable deduction will shelter the estate from tax.
Another option is a charitable remainder trust for the surviving spouse. Normally, a remainder trust would not qualify for the estate tax marital deduction, since the surviving spouse is not entitled to all income for life, but rather just the stated trust percentage. However, Code §2056(b)(8) provides for a hybrid trust that does qualify for the marital deduction and also the charitable deduction. The surviving spouse must be the only noncharitable beneficiary [Code §2056(b)(8)(A)], so the trust cannot pay income to children following the death of the surviving spouse, prior to the charitable remainderman. This may not be a problem where the estate is not subject to tax, although the remainder trust with children added might not yield the required 10% charitable remainder [Code §§664(d)(1)(D), (d)(2)(D)]. However, the IRS has ruled favorably where a QTIP trust was to distribute assets to a charitable remainder trust benefitting the decedent’s children, at the death of the surviving spouse (Letter Ruling 9122029).
A surviving spouse can also be given a life estate in a home or farm, with the property passing to charity at his or her death [Code §170(f)(3)(B)(i)]. The survivor must have the right not only to occupy the property, but also to rent the home or farm and receive the income for life [Reg. §20.2056(b)-7(h)].
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