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Monday, August 31, 2015

What are Family Trusts and QTIP Planning?

Special planning is required when a second marriage couple desires to protect the inheritance of both the surviving spouse and the children. Without this special planning, the danger exists that one or the other can become disinherited. Family Trusts and QTIP planning prevent this tragedy.

Here is how they work:

The estate plans of many second marriage couples are designed so that the estate of the first spouse to die is divided into two separate trusts. The first trust is referred to as the "Family Trust" since it is usually designed to benefit the entire family (spouse and children). This trust takes advantage of the deceased spouse's estate tax "applicable exclusions" (an amount that the deceased spouse can leave to the beneficiaries' tax-free).

The instructions of your Family Trust can state that the estate's tax-free assets are to be used to benefit your surviving spouse, along with any children you wish to benefit, in exactly the manner that you want them benefited. During the lifetime of the surviving spouse, the income and principal of the Family Trust can be distributed based upon the needs of both the surviving spouse and the children. This means that you can guarantee that both receive an inheritance!

If your estate has more assets than can be placed in the Family Trust tax-free, the excess assets are then "spilled" into a second trust that is designed to benefit only the surviving spouse for the surviving spouse's lifetime. This second trust is called a Qualified Terminable Interest Property (QTIP) trust because the surviving spouse has only a "qualified" lifetime right to the trust's assets that "terminates" at the spouse's death. The remainder of the QTIP trust can then be distributed as you direct. Under the special rules for the QTIP trust, your surviving spouse is entitled to all of the income of the trust, which must be distributed at least annually. You also have the discretion to give your spouse access to the principal of the trust if you choose to do so.

Property placed in a QTIP trust qualifies for an estate tax marital deduction. This means that the trust's assets are subject to estate taxation only after the death of the  surviving spouse. Thus your spouse can obtain the full tax-free benefits of the trust's assets during his or her lifetime. 

Although the lifetime estate tax-free benefits of the Family and QTIP Trusts for a surviving spouse and children are considerable, this is not its most important feature. The most important feature takes place when the surviving spouse dies. It is then that any remaining assets of the trust must be distributed according to your instructions (not according to the desires of your spouse who might be tempted to leave it to a new spouse or to the children of the new spouse). This type of planning affords you the confidence of knowing that any remaining assets in the Family or QTIP Trusts will go to your children or other beneficiaries exactly as you want. 

Although Family and QTIP trusts offer many attractive planning opportunities in first or subsequent marriages, like all other estate planning tools, they should be considered in light of the specific planning desires of each family. It is a strategy that should only be used after a detailed discussion of your planning goals with the estate attorney concerning how to best protect all of your assets. 


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