Estate planning for couples in a second (or later) marriage can be tricky. Throw in children from a prior marriage and the plot quickly thickens. One tremendous solution which allows a spouse to maintain control of his/her assets while also appeasing the other spouse is to utilize what is known as a QTIP Trust.
Basics of a QTIP Trust: In the estate planning world, a QTIP Trust is a type of trust that allows one spouse (the “gifting spouse”) to transfer an unrestricted amount of assets into trust for the benefit of the marital partner (“the recipient spouse”). Doing so presents no added downside in the form of estate and gift taxes or even, typically, income taxes. Further, the gifting spouse has plenty of options in determining how much flexibility to add to the trust as well as what shall happen under a number of potential circumstances. For example, the gifting spouse may dictate:
-whether the recipient spouse may ever serve as trustee
-a predetermined combination of beneficiaries which he/she would leave all remaining funds to (potential options include the gifting spouse’s children, grandchildren, stepchildren, favorite charities, etc.)
-whether the recipient spouse has no/some/plenty of flexibility in altering the beneficiaries
Planning With a QTIP Trust Offers a Multitude of Benefits: The QTIP’s main purpose is to allow the gifting spouse to both provide financially for the recipient spouse while simultaneously ensuring that same spouse can never disinherit the gifting spouse’s own family from receiving any unspent funds (once both spouses have died). In other words, it provides benefits to the gifting spouse by insulating the funds from the risk of the recipient spouse’s remarriage (under a widow scenario), poor decision-making, and/or creditor issues. By comparison, all non-QTIP assets transferred without such restrictions would lead to a total loss of control by the gifting spouse.
Timing of the QTIP Trust Formation – Immediately upon Death vs. During Life: Historically, the QTIP Trust has been created and funded upon the gifting spouse’s death. In doing so, a gifting spouse is able to retain unfettered lifelong control of his/her assets but prearrange to provide some support for his/her surviving recipient spouse (should the gifting spouse die first). That being said, implementing the strategy during the gifting spouse’s life can also be a useful technique. For example, couples with disproportionate assets may prefer this option as it provides favorable tax planning opportunities (particularly if the “wealthy spouse” dies first).
Do You and Your Spouse Need a QTIP Trust? As with other types of estate planning, QTIP Trusts are not “one size fits all” and must be specifically tailored to each couple’s unique family dynamics and financial situation. Please call our firm if you think you and your spouse fit the QTIP Trust profile and we will help you determine what will work best for your family.
