If you want to preserve as much wealth as possible for your children, but you leave property to your spouse outright, there’s no guarantee your objective will be met. This may be a concern if your spouse has poor money management skills or, more importantly, if you are in a second marriage and have children from the first marriage. In both of these situations, a properly designed qualified terminable interest property (QTIP) trust may be the answer.
How QTIPs Work
A QTIP trust provides your spouse with income for life while preserving the trust principal for your children. By appointing a qualified trustee, you can have greater confidence that the assets will be invested and managed wisely. And the trust documents will ensure that, upon your spouse’s death, the trust assets will be distributed to your children according to your wishes.
Estate Tax Advantages
Unlike most other trusts, a QTIP trust is eligible for the unlimited marital deduction. This 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.
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. The assets will, however, be included in your spouse’s taxable estate.
Harness the Power
There are many ways you can provide for your spouse and children after you die. But harnessing the power of a QTIP trust might just be right for your situation. We can help you determine the best tools to ensure your estate is distributed as you desire while keeping taxes to a minimum. You can reach me at SDitman@BerdonLLP.com or contact to your Berdon advisor.
In an upcoming blog, we’ll look at 2nd marriages and how, without proper planning, you could unintentionally short change your current spouse.
Scott T. Ditman, CPA/PFS, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.