Estate planning for a blended family may be difficult, so if you have children from a previous marriage, a Qualified Terminable Interest Property Trust may be worth looking into. Be sure to discuss your particular needs with an estate planning attorney.
Leaving your assets outright to your spouse may not be the most appropriate decision, especially if you have kids from previous relationships. Though that would help ensure your husband or wife is provided for after your passing, it doesn’t necessarily mean that your children will be the beneficiaries of your spouse’s estate after his or her death. That’s where a QTIP Trust can work to benefit both your spouse and your children.
A QTIP Trust would enable your current husband or wife to benefit, after your death, from the assets you leave behind. Your bereaved spouse, another individual, bank or trust company, can serve as trustee. During the surviving spouse’s lifetime, he or she will generally receive all of the trust income and may also be entitled to receive amounts of trust principal as well; that’s something you need to decide when setting up the trust with an estate planning attorney.
Any remaining assets at your spouse’s death can ultimately be passed down to your children or other beneficiaries (who may be from a previous marriage or relationship, and not the natural beneficiaries of your current spouse). Again, you decide how those assets are distributed to your surviving beneficiaries. A QTIP can ensure your significant other is provided for, while making sure your other loved ones don’t miss out on their rightful inheritance.
Even if you and your current spouse have common beneficiaries, a QTIP can be useful if your husband or wife is not good with handling money; or if they have creditor or asset protection issues; or if they are disabled, for example.
A QTIP can also help if your estate is taxable
The 2016 estate tax exemption amount is $5.45 million, so anything over that limit is generally subject to federal estate tax ($10.9 million, with portability, between spouses). A QTIP Trust would save your other half from having to hand over anything to Uncle Sam, since it qualifies as an estate tax marital deduction. Meaning, any amounts passing into a QTIP upon your death would avoid estate tax. Any amounts remaining in the trust are, however, includable in your surviving spouse’s estate when he or she passes on—and are potentially subject to estate tax at that time. If any tax is due, as a result of the QTIP assets being includable in your spouse’s estate, it will generally be paid out of the QTIP Trust. Any remaining amounts would then pass to your beneficiaries as described in the trust terms.
Protecting your loved ones
QTIPs offer protection related to the financial management of the trust, meaning that the first deceased spouse can choose a trustee to invest trust assets and determine distribution decisions for the benefit of the surviving spouse. (Of course, the surviving spouse could always serve as his or her own trustee, if this is not a concern).
There are creditor protections as well. If the spouse has creditor concerns or is in a high liability profession, such as a doctor or a lawyer, a creditor could generally get at the trust income (due to the mandatory distribution of trust income per the QTIP Trust rules). However, a creditor could not generally force the trustee to take a distribution of trust principal to satisfy a claim.
Ultimately, a QTIP Trust protects your current spouse by providing financial security (often for life) while ultimately benefiting your surviving beneficiaries.