If you are in a second marriage or contemplating a second or third marriage, estate planning can be complicated, especially if you have children from a previous marriage and your net worth is large enough that estate taxes are a concern. One strategy for meeting this challenge is to set up a qualified terminable interest property (QTIP) trust.
Wealth transfer tools
A planning tool for affluent couples is the marital deduction, which allows one spouse to transfer an unlimited amount of wealth to the other tax-free. To take advantage of the marital deduction, you generally must leave assets to your spouse outright. However, there’s no guarantee that your current spouse will provide for your children from a previous marriage.
This is where a QTIP trust can help. It allows you to enjoy the benefits of the marital deduction and provide for your current spouse (through annual payouts of trust income) while preserving the principal of the trust for the benefit of your children from a previous marriage.
When you establish a QTIP trust, the marital deduction shields the trust assets from estate taxes. When your spouse dies, the assets are included in his or her estate and may be taxable, depending on the size of his or her unused exemption.
Because your children won’t receive their inheritance until your current spouse dies, a QTIP trust may not be the best choice if your spouse is significantly younger than you. Under those circumstances, consider other alternatives, such as an irrevocable life insurance trust (ILIT) to provide for you children upon your death or lifetime gifts to your children. This way, they will not to wait for their step-parent to die before receiving a portion of their own parent's estate.
Plan with care
Remarrying can complicate estate planning, especially when there are children from a previous marriage. To avoid undesirable outcomes, work with us to ensure your plan reflects your wishes.