One of the fundamental goals of an effective estate plan is to reduce the amount of estate taxes paid.  One way to reduce estate taxes is to take advantage of the marital deduction.  The marital deduction allows you to leave an unlimited amount of assets to a surviving spouse without having to pay estate taxes.  For this reason, it is often a good idea to leave a substantial amount of the deceased spouse’s estate to the surviving spouse.  Aside from tax considerations, another reason it is a good idea is that, generally, the deceased spouse wants to ensure that the surviving spouse is taken care of for the remainder of his or her life.

However, what if the surviving spouse has creditors after them?  Or what if the surviving spouse has children from a prior marriage?  What if you are concerned that after you pass away, your spouse might remarry?  You may be torn between your desire to provide for your spouse during his or her lifetime and your concern that he or she may distribute some or all of the assets left by you to his or her children from a prior marriage or to a new spouse, while neglecting your descendants.

Fortunately, there is an estate planning tool called a QTIP (Qualified Terminable Interest Property) trust that deals with this exact situation.  With a QTIP trust, you can leave assets in a trust, where the sole income beneficiary of the trust is your surviving spouse for the remainder of their life.  Then when the surviving spouse passes away, the property can go to remainder beneficiaries specified in the trust.  This allows you to provide for your surviving spouse during his or her lifetime, but also control distribution of the trust assets after he or she passes away.

Assets put into a properly designed QTIP trust also qualify for the marital deduction.  This means that there will be no estate tax on these assets at your death.  The assets will be subject to the estate tax for purposes of the surviving spouse’s estate when he or she passes away, but that would be the case even if you left the assets to them outright.  In order to qualify for the QTIP election, all income from the trust assets must go to the surviving spouse at least annually.  Also, no principal from the trust may be distributed to anyone other than the surviving spouse during his or her lifetime.  A properly designed QTIP trust will also provide some asset protection if, for example, the surviving spouse has creditors after him or her.

Because of the complexities and nuances in the tax code and asset protection laws, you should consult with a competent attorney experienced in estate planning and asset protection before implementing any of these strategies.

Because a QTIP trust is a separate irrevocable trust, creating and managing one does add some complexity to your estate plan.  For example, there will need to be, among other things, a separate tax ID number, separate bank accounts, and separate bookkeeping.  You should weigh these added costs against the benefits of including a QTIP provision in your estate plan.  An experienced attorney can help you make an informed and intelligent decision whether or not a QTIP provision is right for you.

For additional reading:

Trust Planning for Second Marriages

An Asset Protection Trust


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