Second marriages can open a new and joyful chapter in life, especially after a bitter divorce or the pain of a first spouse’s death. Unlike a first marriage, in which your whole future lies ahead, by the time you arrive at the threshold of your second marriage, you have some history. That history often includes children from the first marriage. Your children are an important part of your life, and you want to continue planning for their futures, even as you embark on your own with a new spouse. The tension between these—the desire to leave a legacy for your children while also providing for your spouse—can complicate estate planning. This is why estate planning professionals sometimes recommend QTIP trusts for second marriages.
A QTIP, or Qualified Terminable Interest Property trust, is authorized by language in Internal Revenue Code Sections 2056(b)(7) and 2523(f). What can a QTIP trust do for you and your family? It can prevent unintended outcomes in the event of your remarriage and subsequent death.
Imagine this (unfortunately common scenario): your first spouse dies after your children are grown. A few years later, you find love again and remarry. You and your spouse make new wills, naming each other as sole beneficiaries. You don’t want to leave your children out in the cold, but you’re confident your new spouse will take care of them.
You die a couple of years later. As your will directs, your spouse takes all the property. When your spouse dies a few years after you, per their latest will, their adult children take all their assets—many of which used to be your assets. Your adult children, who have patiently waited for their share, get nothing.
What if you didn’t have an estate plan at all in this scenario? Under Ohio state law, your children would inherit part of your assets and your spouse the remaining portion. Your spouse having only half the assets available to them that they had before your death could cause their standard of living to take a serious blow. In an ideal situation, your spouse would have access to the assets during their life, but they would go to your children or other beneficiaries you choose after your spouse’s death.
A QTIP can help make that ideal scenario a reality. In essence, a QTIP trust divides your property into two portions: the property itself, called the principal or “corpus,” and the interest or income. If your trust contained some Certificates of Deposit (CDs) and your stock portfolio, the interest earned by the CDs and the dividends paid by the stock would constitute the income; the stock itself and the amount deposited in the CDs would constitute the corpus.
In order to qualify for the marital deduction, your QTIP trust must provide for all trust income to be distributed to your spouse during his or her lifetime. The trust must contain language to the effect that the marital trust terminates on the death of your spouse. After your spouse’s death, the corpus can be distributed to beneficiaries you have chosen, like your adult children.
In past years, QTIP trusts were popular because of the “Q:” qualification for the unlimited marital deduction from estate tax. With recent changes in federal tax law, far fewer people are subject to estate tax, so this is is not as significant a benefit as it once was. However, that doesn’t mean that QTIPs are no longer relevant.
With a properly drafted QTIP trust, your spouse has the security of knowing that they will have the income they need to live in the manner they did during your life. Your children have the certainty that the inheritance you intended for them is safe. You have the peace of mind of knowing that all the people you love are provided for.
The words “properly drafted” are key: if the document creating the QTIP trust does not contain the language required by the law, it may not have the effect you intend. You should work with an experienced estate planning attorney to protect your spouse as well as your children or other chosen beneficiaries. An experienced attorney will be able to advise you whether a QTIP trust or another option is best for your particular needs. If a QTIP trust is ideal, an attorney who concentrates their practice in this area will be able to draft the trust documents so that your aims are accomplished.
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