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Married With Children? Consider a QTIP Trust

Estate planning is often sensitive for affluent individuals, especially for those with children and who have been married more than once. Even with the current estate-tax exemption of $2 million, federal estate-tax complications may arise in the future. For instance, assuming you pass away first, you will probably want to benefit both your survivingspouse and the children of your first marriage. In this case, a qualified terminable interest property (QTIP) trust may meet your needs.

How it works: The trust pays out money to your surviving spouse while he or she is alive. Upon your spouse's death, the assets go to the beneficiaries you have selected. Best of all, there is no estate-tax bill when you pass away. Your surviving spouse's subsequent transfer to your children may be sheltered by the estate-tax exemption.

Let's take a step back to fully explain the benefits. Under the current unlimited marital deduction, any property that is transferred from one spouse to another is completely free of estate and gift tax. In other words, if you leave property to your spouse when you pass away, there is no tax whatsoever. However, the marital deduction generally is not allowed for property passing to a spouse for his or her life and then to someone other than the surviving spouse.

Fortunately, there is an exception for assets transferred to a QTIP trust. If certain requirements are met and a timely election is made, the value of the property qualifies for the marital deduction. Subsequently, the remaining assets are included in the taxable estate of the surviving spouse.

How does a family qualify for the QTIP exception? The surviving spouse must have a “qualifying income interest for life.” In general, the following conditions must be met:

*The spouse must be entitled to all the income from the property for life or all the income from a specific portion of the property.

*The income is payable annually or at more frequent intervals.

*The surviving spouse has the right to enjoy theproperty and benefit from it for his or her lifetime.

*No one, including the surviving spouse, has the power to transfer any part of the property to another person while the surviving spouse is still alive.

There are, however, a couple of key exceptions to these rules. First, a spouse still may maintain the right to dispose of an income interest. Second, the transfer of a remainder interest is not prohibited as long as the spouse's income interest is not affected by the transfer.

Although a QTIP trust is commonly used in second and third marriages, it can serve other purposes. For instance, you might be concerned that your surviving spouse will squander his or her inheritance. In that case, a QTIP trust may be appropriate.

The election to qualify for the QTIP exception is made by the executor of the estate of the first spouse to die. Once the election is made, it is irrevocable.

A word of caution: This is a sophisticated estate-planning technique. Don't try to do it all on your own.

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	[ return to list ] Married With Children? Consider a QTIP Trust Estate planning is often sensitive for affluent individuals, especially for those with children and who have been married more than once. Even with the current estate-tax exemption of $2 million, federal estate-tax complications may arise in the future. For instance, assuming you pass away first, you will probably want to benefit both your survivingspouse and the children of your first marriage. In this case, a qualified terminable interest property (QTIP) trust may meet your needs. How it works: The trust pays out money to your surviving spouse while he or she is alive. Upon your spouse's death, the assets go to the beneficiaries you have selected. Best of all, there is no estate-tax bill when you pass away. Your surviving spouse's subsequent transfer to your children may be sheltered by the estate-tax exemption. Let's take a step back to fully explain the benefits. Under the current unlimited marital deduction, any property that is transferred from one spouse to another is completely free of estate and gift tax. In other words, if you leave property to your spouse when you pass away, there is no tax whatsoever. However, the marital deduction generally is not allowed for property passing to a spouse for his or her life and then to someone other than the surviving spouse. Fortunately, there is an exception for assets transferred to a QTIP trust. If certain requirements are met and a timely election is made, the value of the property qualifies for the marital deduction. Subsequently, the remaining assets are included in the taxable estate of the surviving spouse. How does a family qualify for the QTIP exception? The surviving spouse must have a “qualifying income interest for life.” In general, the following conditions must be met: The spouse must be entitled to all the income from the property for life or all the income from a specific portion of the property. The income is payable annually or at more frequent intervals. The surviving spouse has the right to enjoy theproperty and benefit from it for his or her lifetime. No one, including the surviving spouse, has the power to transfer any part of the property to another person while the surviving spouse is still alive. There are, however, a couple of key exceptions to these rules. First, a spouse still may maintain the right to dispose of an income interest. Second, the transfer of a remainder interest is not prohibited as long as the spouse's income interest is not affected by the transfer. Although a QTIP trust is commonly used in second and third marriages, it can serve other purposes. For instance, you might be concerned that your surviving spouse will squander his or her inheritance. In that case, a QTIP trust may be appropriate. The election to qualify for the QTIP exception is made by the executor of the estate of the first spouse to die. Once the election is made, it is irrevocable. A word of caution: This is a sophisticated estate-planning technique. Don't try to do it all on your own. [ return to list ]
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