Stopping Tax on Red Portion

A QTIP trust gives a surviving spouse all the income from the trust for the remainder of his or her lifetime. The estate of the person who funded the QTIP trust avoids tax on the value of the trust (assuming that the surviving spouse is a U.S. person).

The Red Portion of a Model Offshore Trust can operate as a QTIP trust, so that none of your Model Offshore Trust attracts estate tax for your estate.

To make that happen, advise the Trustee to execute a QTIP Declaration providing that (i) your surviving spouse shall receive all the income from the Red Portion, (ii) the Red Portion shall not be invested in non-income producing assets without the consent of your surviving spouse and (iii) during that person’s remaining lifetime, assets from the Red Portion may be distributed only to your surviving spouse.

Such a QTIP Declaration would have no effect during your lifetime and could be revoked while you are alive. It becomes effective and irrevocable only at your death.

If your spouse is a U.S. citizen and does in fact outlive you, then your entire Model Offshore Trust should escape being taxed as part of your estate.

But the QTIP portion will eventfully be part of the estate of your surviving spouse. Thus the effect of the QTIP Declaration is to buy time (the number of years by which your spouse survives you) to reduce potential estate tax by living off the Red Portion and by further estate planning transactions to nourish the Green Portion.

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