Several years ago, Jack's father died. Jack grieved not only for his father's passing, but also for his widowed mother who had been married to Jack's father for 35 years. In due course, Jack's mother remarried. However, when she eventually passed away, Jack suffered a double loss: Jack not only lost his mother, but also most of his inheritance. Just the year before, she had given her second husband a substantial sum to start a new business.
Jack's father could have preserved Jack's inheritance, while at the same time providing for Jack's mother, with a qualified terminable interest property (QTIP) trust.
How It Works
With a QTIP trust, rather than simply leaving your assets to your spouse outright in your will, you specify that all or a portion of your assets should be transferred to the trust upon your death. The trustee you choose is legally responsible for holding and investing the assets as you provide. The QTIP trust pays your spouse a life income. After your spouse dies, your children (or anyone else you choose) will receive the trust principal. With a QTIP trust, your spouse cannot prevent the trustee from transferring the assets to your intended beneficiaries.
Current federal estate-tax law allows an unlimited marital deduction for assets that pass from one spouse to the other. To secure the deduction, assets generally must pass to the surviving spouse directly or through a qualifying trust. Thus, it's important to structure your QTIP trust so that the trust assets qualify for the marital deduction. This will allow your estate to avoid paying taxes on the trust property. The trust assets will be included in your spouse's gross estate for estate-tax purposes. However, your spouse's estate will be entitled to a unified credit that could eliminate some -- or perhaps all -- of the estate tax.
Many estate planning decisions that are simple for traditional families can prove very complicated in today's age of multiple marriages and "blended families." There are many scenarios in which a QTIP trust can be used to prevent future problems. Consider a remarriage involving children from a former marriage. In this case, a QTIP trust can help control the ultimate disposition of assets. The trust also can be used when professional management of assets is desirable for the surviving spouse. After all, placing assets directly in the hands of a spouse who may lack investment or financial experience can be a costly mistake.
By setting up a QTIP trust, you make sure that your trust assets will eventually go to the individuals you choose to receive them. The result will be the same even if your spouse remarries, drafts a new will, or experiences investment losses. You'll be able to provide for your spouse and preserve assets for your children or other beneficiaries, regardless of how your family's circumstances may change.
Experience Is Essential
A problem-free QTIP trust requires an experienced professional trustee who can manage the trust for your surviving spouse and children in accordance with your wishes. Your financial advisor can help you secure the services of a qualified professional with experience administering QTIP trusts. Together, they can help to ensure that your assets are well cared for throughout the term of the trust.
This communication is not intended to be legal/estate planning advice and should not be treated as such. Each individual's situation is different. You should contact a qualified legal/estate planning professional to discuss your personal situation.
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Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail firstname.lastname@example.org.
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