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QTIP allays fears of second-marriage couples

Love may abound the second time around. But estate planning can be unhappy when bride or groom, or both, have been married before.

In years gone by, most couples married, had children, and lived out their days in confidence that when they died their children would inherit the fruits of their work. Today, in 30 percent of all marriage ceremonies, at least one of the partners has been married before. In many of these remarriages, one or both partners have children from a previous marriage. This fact of remarried life causes second-marriage couples great concern about their estate planning.The following scenario is common: A mother of two becomes widowed. Her deceased husband has left her his assets and life insurance proceeds. She remarries. Her second husband has three children of his own and assets from his first marriage. She is torn. As much as she cares for her new spouse and his children, she feels that her assets should go to her children if she passes away. She wants the assurance that the wealth she brought into their marriage will eventually go to her children, and no one else. In some marriages, it's not just one spouse, but both, who have this concern.

One often used solution is the Qualified Terminable Interest Property Trust (QTIP for short). A QTIP trust is often created within a revocable trust. The QTIP trust allows a spouse to protect the financial security of her surviving spouse and, at the same time, ensure that the bulk of her assets go to her children. On top of that, the QTIP provides estate tax protection as well.

As far as estate taxes are concerned, a person can leave assets of up to $600,000 to loved ones estate-tax free, but estates over that amount are taxed at a rate of 37 to 55 percent of the excess. If the person is married, the law (i.e. Unlimited Marital Deduction) says that she can leave unlimited assets to the other spouse tax free. As noted above, however, the spouse may want her children, not her second husband, to get her assets. How can she provide some limited financial security for her husband, qualify for the unlimited marital deduction and, at the same time make sure the bulk of her assets goes to her children? Her desires can be realized through a properly drafted QTIP trust that qualifies for the Unlimited Marital Deduction even though the ultimate beneficiaries of the assets are her children from the first marriage.

As with all trusts, the QTIP trust is simply a holding device for assets. The one who creates the trust, called a trustor, makes the key decisions about the trust, such as who the beneficiaries will be and who will serve as the manager of the trust or "trustee." The trustee plays an important role in the QTIP trust's success. The trustee manages the investments in the QTIP trust and oversees the distribution of income to the survivor, according to the provisions mandated by the trustor. In addition to all the annual income generated by the trust, the trustor may (or may not) choose to put provisions in the trust that allow the surviving spouse to have access to some of the principal to meet certain needs such as health, education, maintenance and support.

A married couple can create a joint married revocable trust that has QTIP trust provisions for the assets of each spouse. While both spouses are alive, the QTIP trust provisions are invisible. If need be, the trust can be amended or even revoked. If the trust is revoked, each spouse gets back the assets he or she contributed to the trust. Upon the death of a spouse, the QTIP trust provisions then serve to manage his or her assets in a way that provides limited or somewhat liberal financial security for the surviving spouse. When the survivor passes away, the assets in the QTIP trust go to the trustor's beneficiaries.

There are other alternatives to the QTIP trust that can give you and your spouse the control and financial security you both seek. Look into your estate planning options. But be careful, because while one option may at first appear to be the perfect solution, it may carry with it consequences that, for your particular circumstances, are not desirable. With careful planning you can ensure that "happily ever after" includes your family as well as you.