Revocable Trust for Married Individual
(Credit Shelter and QTIP Trusts with GST Tax Planning) (PA)

Summary

This is a template for a revocable trust that is suitable for a married person residing in Pennsylvania who is expected to have a large enough estate to be subject to federal estate tax at death. The trust is designed to benefit the settlor during his or her lifetime and the surviving spouse and descendants after the settlor's death. The trust also incorporates planning for the generation-skipping transfer (GST) tax. The template contains practical guidance, drafting notes, optional clauses and alternate clauses. This trust is designed to enable the settlor's estate to pay the least possible federal estate tax and to take maximum advantage of the federal unified credit ($13,610,000 per person in 2024) and the exemption from generation skipping transfer (GST) tax. The use of a stand-alone revocable trust rather than a testamentary trust is often preferable for large estates. One benefit is that the trust can be funded during the settlor's life, if, for example, the settlor wishes assistance with the management of his or her assets or with record-keeping. The settlor can observe how the co-trustee manages the trust and decide whether the trustee's actions meet the needs of the settlor and the settlor's family. Also, since neither the trust instrument nor the trust accounts need be filed with the Orphans' Court, the trust's assets and accounts will not be a matter of public record and the family can maintain its privacy. Although assets placed in the trust before the settlor's death will not be subject to probate, they will be subject to death taxes (Pennsylvania Inheritance Tax and Federal Estate Tax). "Revocable trust" is another name for "living trust" or "inter vivos trust." Although their use is not as widespread in Pennsylvania as in other states, revocable trusts serve several purposes: as will substitutes for probate avoidance, to hold out-of-state property, and to function in the event of the settlor's possible incapacity. Because settlors retain control over the trust assets, revocable trusts do not reduce or eliminate federal estate taxes or Pennsylvania inheritance taxes, nor do they provide asset protection for the settlors. To ensure that the decedent settlor's assets are properly transferred to his or her intended beneficiaries, a revocable trust should be used and coordinated with a pourover will. For an example of the latter, see Will for Married Individual (Pour-Over to Revocable Trust) (PA). Upon the settlor's death, this trust is divided into two irrevocable trusts: a marital trust, which will primarily benefit the surviving spouse, and a credit shelter trust, which will benefit the settlor's issue, other family members, or charities. (The credit shelter trust is referred to as the Family Trust in this Trust Agreement.) If both trusts are properly funded and administered, there will be no federal estate tax due at the settlor's death if the settlor predeceases his or her spouse. An optional provision authorizes the executor of the settlor's estate to elect to meet the requirements necessary to qualify the marital trust assets as qualified terminable interest property (QTIP) in order to take advantage of the marital deduction. There are several advantages to the inclusion of a QTIP trust provision in this revocable trust: (1) it gives the executor flexibility to determine the extent of the QTIP election, (2) it allows for a step-up in the basis of the QTIP trust assets upon the death of the surviving spouse, (3) it provides guidance on the distribution of the assets at the death of the surviving spouse, and (4) it enables the avoidance or deferral of federal estate taxes. Generally, a revocable trust that includes a QTIP trust is suitable either for taxable estates or those likely to file a federal estate tax return for portability, because the executor must make an affirmative election to qualify all or a part of the Marital Trust as a QTIP trust. See Rev. Proc. 2001-38 2016 IRB LEXIS 580, *2 (I.R.S. September 27, 2016) and Rev. Proc. 2016-49, 2016 IRB LEXIS 580, *1 (I.R.S. September 27, 2016). The Credit Shelter Trust can be funded so as to take full advantage of the federal estate tax credit. For an in-depth discussion of trusts, see Characteristics and Uses of Trusts (PA), Requirements and Restrictions on Trust Purposes and Administration (PA), and Revocation, Amendment, and Termination of Trusts (PA). For an in-depth discussion of the estate tax marital deduction, see Marital Deduction. For an in-depth discussion of planning for the Generation Skipping Transfer Tax (GST), see Generation-Skipping Transfer Taxation.