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Monday, April 25, 2016

The Use of QTIP Trusts in Estate Planning Involving Second Marriages

How should you protect the division of your assets after a second marriage?

In this era of second (or even multiple) marriages, stepchildren, and blended families, QTIP (qualified terminable interest property trusts) are extremely helpful in estate planning. When you have married for the second time and have children from your first marriage, making sure that all of those you love will be provided for after your death becomes increasingly complicated. A QTIP trust accomplishes the following:

  • Allows you to put limitations on your property so it doesn't all go directly to your new spouse
  • If one spouse dies, it allows the surviving spouse to decide what proportion, if any, of the deceased's estate should be held in trust to maximize tax savings

The latter is particularly helpful since estate tax laws are in a continual state of flux.

How does a QTIP trust work?

It is possible for each spouse to set up a QTIP trust, leaving his or her assets to the other. When the first spouse dies, the other spouse receives a "life estate" in the QTIP trust. This means that the surviving spouse receives any income produced by the assets and the use of any real estate property. The surviving spouse is the only person who can be named as a life beneficiary. It is noteworthy, however, that the surviving spouse does not have full ownership of the assets. He or she cannot sell them or give them away.

At the time of the second spouse's death, the trust assets go to the "final beneficiary" named in the trust. The final beneficiaries are most the children from the other spouse’s previous marriage.

The QTIP Trust Requires a Trustee

When you establish a QTIP trust, you are required to name a trustee as well as beneficiaries. Your trustee may be:

  • Your spouse
  • One of your adult children
  • A disinterested third party
  • A hired professional

If you choose to use a professional as a trustee, you should be aware that he or she will charge a fee (typically a percentage of the assets). Professional trustees usually only involve themselves where the estate is very large.

Advantages of a QTIP Trust

There are many advantages to having a QTIP trust, especially in terms of keeping peace in the family. There is almost always some tension between the second spouse and his or her stepchildren, made more acute when a large inheritance is at state.  When your children from a previous marriage understand that they will eventually inherit your assets, it can alleviate tension and possible resentment. By the same token, your new spouse will be relieved to find that he or she will be taken care of during his or her lifetime and not be financially abandoned at the time of your death.

How does a QTIP affect estate tax?

While a QTIP trust doesn’t eliminate estate tax, it does delay its imposition until the death of the second spouse. One you have created a QTIP trust, there will be no estate tax due on the assets that go into the trust at the time of your death. You can, however, get these estate tax benefits only if your spouse is a U.S. citizen.  Since same-sex marriage became legal in all 50 states in 2013, QTIP trusts marital tax deductions apply to same-sex marriages as well.

When the second spouse dies, estate tax is due on all of that spouse's assets, including those that had been held in the QTIP trust. For deaths that occur in 2016, federal estate tax will only be owed if the estate exceeds $5.45 million in value. Since 99.5 percent of all estates are valued below that amount, the vast majority do not owe federal estate tax.

 If you are in a second marriage, a QTIP trust may be a valuable estate planning tool for you. Estate planning, with or without a QTIP trust is a complex process and should be undertaken only with the able assistance of an experienced and skilled estate planning attorney.


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