Yours, Hers, and the Kids': Estate Planning After Remarrying
There is a QTIP that is not for people with delicate cleaning problems. It is for those with a very different problem — the delightful problem of expecting to leave substantial assets to heirs.
In income-tax lingo, a QTIP is a qualified terminable interest property trust. Its purpose is twofold. One aim is to leave the bulk of an estate to someone other than a spouse, and it is often used to guarantee an inheritance to children of an earlier marriage. The second aim is to take full advantage of the unlimited marital deduction in estate tax law. The trust, in effect, gets to use the marital deduction.
With a QTIP trust, "you know where the property is going after the death of the spouse" who dies first, Eric W. Hager, a trusts and estates lawyer at Davidson, Dawson & Clark in New York, explained. "There is almost always concern about kids of a first marriage." The creator of the trust, in effect, gets to decide who gets what.
Elena Villafane, a trusts and estates lawyer at Polin, Prisco & Villafane in Glen Cove, N.Y., said that wealthy people could satisfy both a second spouse and children from a previous marriage with a QTIP trust.
Using what she admitted was a stereotypical example, she said, the trust could prevent a second wife from "running off with the assets" of a deceased husband.
Under tax law, the surviving spouse must get all the income from the trust every year. Because the trust provides lifetime income for a hypothetical spouse, then eventually gives the assets to the children of the person who set up the trust, Ms. Villafane said, it allows an older, richer spouse to say, in effect, "I took care of you both."
While QTIP trusts are often used in second and third marriages — what Richard J. Shapiro, an estate planning and elder law lawyer at Blustein, Shapiro, Rich & Barone in Goshen, N.Y., jokingly called "a Donald Trump arrangement" — they can also be useful in an intact family.
Leaving assets in a trust rather than outright to the surviving spouse provides "creditor and predator protection," he said — conjuring up an image of an overbearing new spouse for a widow or widower. And by guiding financial decisions in an intact family, a trust can make firm inheritance arrangements and can be "a friendly hand from beyond the grave," Mr. Shapiro said.
Tax deferral is a consideration, "but the protective aspects of a marital trust" are also important, he said.
The tax-deferral aspect arises because a QTIP trust defers estate taxes when the surviving spouse is not the ultimate beneficiary of the bulk of the other spouse's assets, because the tax is not due until the surviving spouse dies, Mr. Hager and Mr. Shapiro said. Without that trust, the ultimate heirs would face estate taxes as soon as their benefactor died.
Because a QTIP trust makes use of the estate tax marital deduction, it is not useful for people who are not married.
The person who creates a QTIP trust does not put any assets in it while he or she is alive, and thus does not give up any control. A QTIP trust is usually part of a will, not a separate document, the lawyers who draft trusts said.
The QTIP trust does not appear to provide any federal estate tax benefits to same-sex couples, because a federal law, the Defense of Marriage Act, does not recognize same-sex marriages.
But Ms. Villafane said same-sex couples could claim state estate tax benefits in New York, which does recognize same-sex marriages. The same is likely to hold true in other states that recognize such marriages.
The federal estate tax picture for same-sex couples could also change. One challenge to the Defense of Marriage Act making its way through the courts involves estate tax. The survivor of a married lesbian couple was denied a marital estate tax exemption to which a surviving spouse is entitled.
A federal district court in New York found the law unconstitutional, and the United States Court of Appeals for the Second Circuit heard arguments on an appeal of that ruling last month. Its eventual decision could be appealed to the United States Supreme Court. (The court has been asked to hear another case challenging the law.)
Mr. Shapiro said that for New York State residents, a QTIP trust could make sense when assets reached $1 million, because that is the state's estate tax exemption. Some other states also have lower exemptions than the $5 million that federal law provides. Generally, he said, people who do not expect their assets to reach those levels would not benefit from having QTIP trusts, though they could still provide asset protection.
Other kinds of trusts could also achieve that goal. And the federal exemption will drop to $1 million on Jan. 1 if Congress does not act, which is making some people with assets exceeding that amount nervous, Ms. Villafane said. That could lead some to set up QTIP trusts now — just in case.