Second and subsequent marriages that occur later in life present challenges when it comes to estate planning. While no longer unusual or unique – nearly 42 million Americans have been married more than once – planning to provide for the surviving spouse, be fair to children from previous marriages and protect surviving spouses and adult children from scam artists, requires the use of complex estate planning instruments like the QTIP.
Older adults marrying for the second time presents a typical scenario for using a QTIP (Qualified Terminable Interest Property). One spouse worries: what if he dies, his second wife remarries, and his children never receive the benefit of his hard work? Investor’s Business Daily explores this issue in “Cut Taxes, Send Assets To Loved Ones After Your Death.” By creating a QTIP trust, the flow of assets can be better controlled.
A QTIP typically doesn’t have estate taxes. The surviving spouse must be a U.S. citizen and must be entitled to all of the trust income, which has to be paid out at least once a year during the survivor's lifetime. No one else can receive trust distributions during that time. At the same time, the trust creator can give the trustee some flexibility: the distributions of principal to the survivor might be allowed to pay living expenses and essential medical bills. However, the surviving spouse need not control the QTIP assets.
Here’s another example: What if Carl marries Ella and each has children from a prior marriage. Carl passes and leaves most of his wealth to a QTIP trust for Ella, so that she will have cash flow for life. She’s not allowed to name new beneficiaries who'll get the QTIP assets after she dies. The QTIP assets will pass to the beneficiaries that Carl named, and those assets will be taxed in Ella's estate. Both spouses can create QTIP trusts.
The trust creator has to authorize his or her executor to finalize your QTIP election after your death, and federal and state elections may have to be made to get full estate tax deferral. An estate planning attorney knows all about this. It’s important that your family understands the QTIP’s goals to alleviate conflict after your death. The QTIP allows your spouse to have lifetime distributions to maintain his or her lifestyle, and your children will inherit your wealth without having to worry that a stepparent will spend it all after your death.
But a QTIP trust may be a source of conflict, as the surviving spouse may want the trust fund to be invested for income, and the survivor can actually demand that the trustee sell assets that don't produce revenue. The children will likely want the QTIP assets invested for growth. You need to select a trustee who can negotiate peace among beneficiaries. Tax deferral may also mean inheritance deferral, because if your spouse lives a long time after your death, your children will have to wait for a QTIP payout. Consider making some assets available for immediate bequests to descendants, or to provide for them with life insurance that will pay at your death.
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Reference: Investor’s Business Daily (September 4, 2015) “Cut Taxes, Send Assets To Loved Ones After Your Death”