Remarried with children? A QTIP can help you take care of everyone
Key takeaways
- A Qualified Terminable Interest Property trust (QTIP) is a martial trust designed to help you provide lifetime income for a surviving spouse upon your passing.
- QTIPs qualify for the marital deduction, thereby offering an unlimited exemption from estate taxes.
- With a QTIP, once your surviving spouse passes on, your children will inherit the remaining principal.
Divorce rates in the United States are declining overall, and that's good news. But for those over the age of 50, the news isn't as positive. According to the Pew Research Center, since 1990, the divorce rate for couples over 50 has doubled. Further, it has tripled for those over age 65. Those late-life divorces often come with more complicated financial circumstances, including considerable assets and multiple ex-spouses and heirs. They also come with an even more pressing need for careful estate planning.
One estate planning vehicle designed to help avoid future heartache and difficult lawsuits for your surviving family members is a Qualified Terminable Interest Property trust (QTIP). Designed to protect a surviving spouse during their lifetime, a QTIP offers an attractive feature: it qualifies for the marital deduction, thereby offering an unlimited exemption from estate taxes. To capitalize on this benefit, a marital trust must distribute all income to the surviving spouse, the sole beneficiary, on a quarterly basis at a minimum.
Often used as a testamentary trust that's created upon death by your will, a QTIP should have at least one independent trustee to assist your surviving spouse. The trustee must adhere to the rules of the trust and thus may make discretionary or mandatory distributions to your spouse as directed.
Benefits of a QTIP
QTIPs offer several benefits in estate planning. First, they can provide a lifetime income stream for your spouse. And, depending on the terms of the trust, principal may or may not be accessed for the sole benefit of that spouse. Another benefit is that upon the death of the surviving spouse, the remaining principal is bequeathed according to terms set by you, not your surviving spouse. As such, the QTIP is optimal if you've remarried and have children from a previous marriage. In such cases, you'd be able to provide financially for your spouse while having the assurance that your children from your previous marriage will inherit any remaining principal. This is more favorable than if you didn't have a QTIP and simply bequeathed money directly to your spouse. In that case, your spouse would have control of future beneficiaries upon their passing.
Another benefit of the QTIP is that it offers the flexibility to defer estate taxes until your surviving spouse passes. Although the tax law has doubled the estate tax exemption to $11,400 for single taxpayers and $22,800 for married couples filing jointly, those who have a taxable estate will be able to defer taxes on their children's inheritances.
While marriages and family life can be complicated after a late-life divorce, a QTIP can be a valuable estate planning tool that ensures you provide for all those you hold dearest.
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