If the first to die spouse bequests property with large appreciation potential and / or wishes to ensure the disposition of property to specific individuals (e.g., children from a previous marriage) or entities aside from the second to die spouse, then simply transferring the entirety of the first to die spouse’s property to the second to die spouse in order to maximally utilize the unlimited marital deduction (applicable to surviving U.S. citizen spouses) may not be the ideal transfer strategy: the second to die spouse’s estate may not dispose of the first to die spouse’s assets in accordance with the first to die spouse’s wishes and / or the combined applicable credit amount of the second to die spouse after electing portability of the deceased spousal unused exclusion (DSUE) from the first to die spouse may be exceeded by estate tax liability upon death of the second to die spouse due to interval appreciation in fair market value of transferred property, resulting in unwanted transfer tax liability. In both instances, irrevocable trusts (e.g., bypass or credit shelter trusts) may prove to be superior solutions to achieving the transfer objectives of the first to die spouse by potentially removing future appreciation in fair market value of property from spousal gross estates and by directing the ultimate disposition of transferred property via the trust document.
Notably, while assets transferred via Qualified Terminable Interest Property (QTIP) trusts qualify for the unlimited marital deduction and concurrently permit the first to die spouse to direct the ultimate disposition of transferred property via the trust document, assets within QTIP trusts unconsumed by the second to die spouse must be included within the gross estate of the second to die spouse.