The desire to provide for loved ones after you are gone is probably at the top of your list of estate planning goals. If you are part of a blended family, that seemingly simple goal becomes infinitely more difficult to achieve. Your estate planning attorney may recommend a variety of tools and strategies that can help accomplish your goal, including the use of a Qualified Terminable Interest Property, or QTIP, trust. A trust attorney explains how a QTIP trust works so that you can decide if one might make a beneficial addition to your estate plan.
Why Might a QTIP Trust Be Helpful?
In the United States, the divorce rate for first marriages hovers around 50 percent. Not surprisingly, approximately the same percentage of people will go on to become part of a blended family at some point. If you are part of a blended family, you already understand the challenges that come with combining two families into one. All too often, those challenges continue, or even worsen, after the death of one spouse. That reality can create estate planning challenges as well. You undoubtedly wish to provide for your current spouse in your estate plan; however, you may also want to protect assets that are intended for your children from a previous marriage. If you find yourself facing just such a dilemma, you may benefit from the inclusion of a QTIP trust in your estate plan.
If you are like most people, during your first marriage your plan was to leave all your assets to your spouse with the understanding that he/she would then pass those assets on down to your children upon death. Your spouse executed a reciprocal Will and/or a reciprocal estate plan. In essence, whoever died first left everything to the other spouse/parent and everything went to the kids when both parents were gone. That plan no longer works though now that you are divorced and remarried. Now, you want to provide for your new spouse; however, you still want some of your estate to go to your children.
One option now is to leave everything to your current spouse and count on him/her to leave those assets to your children upon death. That would require you to have complete faith that your spouse would follow your wishes instead of squandering, or otherwise depleting, the assets before the end of his/her life. The reality is that if you choose that option, after you are gone your spouse will have complete control over those assets with no legal constraints on their use. Ultimately, your children could wind up with nothing if your spouse intentionally, or unintentionally, fails to honor your wishes. You may feel as though you must choose between protecting your children’s inheritance and providing for your current spouse. Fortunately, there is a way to do both, through the use of a QTIP trust.
How Does a QTIP Trust Work?
A QTIP trust operates in basically the same way as any other trust with some special terms designed to provide for your spouse while protecting your children’s inheritance. You will need to appoint a Trustee to oversee the administration of the trust and to manage the trust assets. Assets transferred into the QTIP trust are not actually gifted to your current spouse when you die. Instead, your spouse receives income from the trust assets but cannot withdraw the principal from the trust nor can he or she decide on the ultimate disposition of the trust assets. In the case of real property, your surviving spouse may also receive a “life estate” in the property, meaning that he or she may remain in the home until death, but will never own the property outright. When your surviving spouse dies all assets held in the trust are then transferred to the intended QTIP trust beneficiaries, typically your children from a previous marriage. Although a QTIP trust does not qualify to use the Marital Deduction rule to defer federal gift and estate taxes under traditional tax rules, the Executor of your estate can elect to use the deduction on your estate tax return.
Contact a Trust Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about incorporating a QTIP trust into your estate plan, contact the experienced trust attorneys at Augulis Law Firm by calling 908-222-8803 to schedule your appointment today.