That said, the unique challenges clients in blended families may experience include more than household harmony and holidays. The responsibility of estate planning can become daunting and downright confusing. As a result, clients may unknowingly disinherit his or her new spouse, his or her children, or both. A horrible thought, to say the least.
Although there are multiple solutions to this challenge, the QTIP (Qualified Terminable Interest Property) Trust is an excellent option, as WealthManagement.com explains. It allows one to provide a lifetime income to the new spouse as well as leave the principal to one's own children (not the spouse's children) when the new spouse dies, if properly designed.
Furthermore, an experienced estate planning attorney can tailor one's QTIP to fit numerous planning scenarios.
To start, at the very minimum to qualify, a client's new spouse must be the only beneficiary of the QTIP during his or her lifetime, must receive all of the net income, and must require that the trustee convert non-income producing QTIP assets into income producing assets.
However, for many, the question is, "What if I want my new spouse to have principal over and above the income?"
In this case, if one wants to protect the QTIP remainder inheritance for his or her own children but still allow the spouse to benefit from a portion of the principal, one can limit the distributions of principal (to the spouse) to needs such as education, health, and any specified support that ensures the spouse maintains his or her accustomed manner of living. This is especially beneficial to the spouse if his or her own assets are insufficient.
Truly, the QTIP is the gift that continues to give back because it provides a means to disinherit the IRS, allowing for some real tax planning magic.
For example, let's say that the wife has an estate worth $10.86 million and the husband has $5,000 in credit card debt. In the event of her death, the wife wants to provide for her husband, leave what remains to her children at his death, and disinherit the IRS out of just above $2 million in federal estate taxes.
Subsequently, the wife dies in 2015, right at the time when the federal estate tax exemption is $5.43 million for each taxpayer. The problem? Her husband has insufficient assets to utilize his exemption, and she is double the limit.
Fortunately, the wife created a QTIP to incorporate into her plan. Therefore, of her $10.86 million, $5.43 passes to her children and the remaining $5.43 million passes to the QTIP for her husband. Thankfully, after smart planning on the wife's part, the peace between her husband and her children remains.
Accordingly, when the surviving husband dies, the remaining value in the QTIP is added to his taxable estate value and utilizes his otherwise wasted estate tax exemption as it passes to his stepchildren.
Making a Real Difference
The wife's use of the QTIP, careful planning on her part, and attention to detail made all the difference in the lives of her loved ones.
There is much more to the QTIP than is addressed here, which is why we recommend anyone interested in learning more to consult an experienced estate planning attorney to fully work out the specifics of one's unique circumstances.
To learn more about common estate planning issues, check out our free guide, Estate Planning Pitfalls: The 12 Most Common Threats to Your Estate & Your Family's Future, or to discuss your estate planning concerns, please call our office at 919-443-3035 or use our contact form.