If you're remarried and have children from a prior marriage, you may worry about how you'll equitably divide your estate among loved ones. A qualified terminable interest property (QTIP) trust may help. It's structured to provide future security to spouses and children as well as tax benefits — even if estate tax laws change over time.
In general, a QTIP trust is created by the wealthier spouse, although sometimes both spouses will establish corresponding trusts. When the grantor dies, the surviving spouse assumes a "life estate" in the trust's assets, which provides the spouse with the right to receive income from the trust but doesn't confer ownership rights. This means the surviving spouse can't sell or transfer the assets. Upon the death of the surviving spouse, the assets are passed to the final beneficiaries, who are typically the children from the grantor's first marriage.
If you establish a QTIP trust, you must designate the beneficiaries as well as a trustee to manage the trust's assets. This could be your spouse, adult child, close friend, or, as is often the case, a third-party professional advisor.
A side benefit of establishing a QTIP trust is that it may alleviate family tensions. Your current spouse can relax, realizing that he or she will be taken care of. At the same time, your children from a prior marriage know that they won't be "cut out of the estate" by a stepparent who might turn against them or remarry in the future.
Of course, a QTIP trust can't provide ironclad protection against family conflicts that may arise after you are gone. For instance, the parties may differ over the allocation of assets from an investment viewpoint. This is one of the reasons why it's often a good idea to appoint an independent professional trustee.
A QTIP trust is designed to combine the estate tax benefits of the unlimited marital deduction and the gift and estate tax exemption. When you create the trust and provide a life estate to your spouse, the assets are sheltered from tax after your death by the unlimited marital deduction.
After your spouse dies, assets in the QTIP trust are subject to federal estate tax. However, the current gift and estate tax exemption will likely shelter most estates from this tax liability.
Of course, at the time of your death, your family's situation or the estate tax laws may have changed. Fortunately, QTIPs are flexible. The executor of your will has the option to not implement a QTIP trust. Otherwise, the executor makes a QTIP trust election on a federal estate tax return. (It's also possible to make a partial QTIP election on just a portion of the estate.) To be effective, the election must be made on a timely filed estate tax return. After the election is made, it's irrevocable.
Depending on your estate size, family structure and goals, a QTIP trust can be used in conjunction with other estate planning tools. But don't delay on setting up an estate plan or revising an established plan to reflect changing life circumstances. Life can be unpredictable!
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