Married with children? As a spouse and parent, you have the difficult challenge of ensuring your spouse is provided for after your death while making certain there are assets left for your children’s inheritances. Trying to meet both objectives while minimizing estate taxes is no small feat. Fortunately, a qualified terminable interest property (QTIP) trust can help. Enjoy a valuable exception The unlimited marital deduction allows you to transfer any amount of property to your U.S. citizen spouse — either during your life or at death — free of gift and estate taxes. A QTIP trust allows you to take advantage of the deduction while controlling the ultimate disposition of the trust’s assets. Ordinarily, to qualify for the marital deduction, you must transfer property to your spouse outright or through a trust in which your spouse’s interest cannot terminate for any reason. A QTIP trust is an exception to this rule: It allows you to provide your spouse with a “terminable interest” in the trust while still qualifying for the marital deduction. This can provide some valuable estate planning benefits. Equalize your estates If one spouse owns the bulk of assets, the couple risks wasting the other spouse’s exemption and incurring unnecessary estate taxes. The simplest way to equalize estates is for the wealthier spouse to transfer assets to the other spouse. This may not be a viable option if the wealthier spouse is concerned that his or her spouse might squander the money or later marry someone who’s after the inheritance. With a lifetime QTIP trust, you can equalize your estates while avoiding these concerns. How? The trust must pay all of its income to your spouse for the rest of his or her life, but you can retain control over the assets and restrict your spouse’s access to the principal. When your spouse dies, the assets go to your children (either outright or in trust), but they’re treated as part of your spouse’s estate so you don’t waste his or her exemption. This strategy has one potential disadvantage: If you and your spouse divorce, he or she will still be entitled to all of the trust income for life. Preserve assets for children Providing for your spouse is important, but it may be just as important to preserve as much wealth as possible for your children. If you leave property to your spouse outright, there’s no guarantee that this objective will be met. A properly designed QTIP trust provides your spouse with income for life while protecting the trust principal and preserving it for your children. By appointing a qualified trustee, you can have greater confidence that the assets are invested and managed wisely. Ease family tension Even in the most harmonious families, matters of inheritance can create conflicts. This may be the case if you’ve remarried and want to provide for your current spouse as well as for children from a previous marriage. A QTIP trust can help ease the tension by providing for your spouse while giving some assurances to your children that something will be left for them. This strategy may backfire, however, if your spouse is considerably younger than you. In that case, your children may have to wait a long time to receive their interests in the trust — or they may effectively be disinherited altogether if your spouse survives them. Consider other tools A QTIP trust is just one of many tools you can incorporate into your estate plan to reduce estate taxes and help ensure your assets are distributed according to your wishes. And it’s a tool that you can use in conjunction with other tools. Take the time now to evaluate your situation or you may miss out on other tax-saving opportunities. • |