As you mature, and both your estate and your family grow, your estate plan will likely become more complex as well. A number of additional estate planning tools and strategies will be added to your initial plan in order to keep up with your changing needs and expanding goals. If you are part of a blended family, one of the estate planning tools you may decide to incorporate into your plan is a Qualified Terminable Interest Property, or QTIP, trust. Only your estate planning attorney can help you decide if a QTIP is right for your plan; however, it may help to learn more about the QTIP trust requirements.
The Blended Family
About half of all first marriages end in divorce in the U.S with about the same percentage of people deciding to remarry. The challenges of blending two families into one are numerous, as you already know if you are part of a blended family. Sometimes, the passage of time brings harmony to the family; however, in other cases, tension continues to exist, or may even worsen, long after the marriage. The death of one spouse can exacerbate that tension and may even lead to bitter and costly litigation. A well thought out estate plan can go a long way toward preventing contentious litigation after your death if you are part of a blended family, particularly if you are concerned about providing for your current spouse without putting assets intended for your children from a previous marriage at risk. This is where a QTIP trust may be able to help.
Why Might You Need a QTIP Trust?
During your first marriage, you probably created reciprocal estate plans. You left all your assets to your spouse with the understanding that he/she would then pass those assets on down to your children upon death and your spouse did the same. Now that you are remarried, however, that strategy no longer works. The dilemma you now face is that you likely want to provide for your current spouse while still setting aside assets for your children from your first marriage. You could leave everything to your current spouse and trust that he/she will leave those assets to your children upon death. Not only does that require a tremendous amount of trust in your spouse, but it also does not account for a whole host of intervening problems that could deplete the assets you intend to be passed down to your children. Your children could wind up with nothing. Fortunately, there is a way to both provide for your current spouse and protect assets earmarked for your children – by creating a QTIP trust.
QTIP Trust Requirements
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.
QTIP Trust and Estate Taxes
Another advantage of using a QTIP trust is the flexibility it provides with regard to federal gift and estate taxes. The Executor of your estate can put some, or all, designated assets into the trust after your death. Assets that go into the trust are not taxed until the death of the surviving spouse. This can also be beneficial if the tax laws are not favorable at the time of your death. Your Executor must make a QTIP election on the tax return filed after your death and indicate which assets are to be transferred into the trust. This is one of the many reasons why you should work closely with an experienced trust attorney if you are considering the inclusion of a QTIP trust into your estate plan.
Contact Indianapolis Trust Attorneys
For more information, please join us for one of our FREE seminars. If you have specific questions about QTIP trust requirements, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.