Is your family a "blended family"? If yes, then you are in good company.
It seems some 42 million adult Americans have been married more than once, a 20 million increase just since 1980.
Not only do holidays present unique challenges to blended families, but so does estate planning.
Can you say "elephant in the room"?
Are you going to disinherit your new spouse or your own children from a prior marriage?
Is there a remedy?
Yes, there are multiple solutions, however, today we are focusing on the venerable QTIP Trust.
[No, this is not the kind of QTIP you can get from Johnson & Johnson for cleaning your ears.]
This topic was picked up in a recent article in Investor’s Business Daily titled “Cut Taxes, Send Assets To Loved Ones After Your Death.”
Spoiler alert: A properly designed and funded QTIP allows you to provide a lifetime income for your new spouse and leave the remaining principal to your own children (not his or her children) when your new spouse dies.
But wait, there is more to it.
You can design features into your QTIP to fit multiple planning scenarios.
At a minimum to qualify as a QTIP your new spouse (as beneficiary) must be the only beneficiary of the QTIP during his or her lifetime, must receive all of the net income and must be able to compel the trustee to convert non-income producing QTIP assets into income producing assets.
What if you want your new spouse to have principal over and above the income?
If you want to protect the QTIP remainder inheritance of your own children, then limit distributions of principal to such needs as health, education, maintenance and support in his or her accustomed manner of living especially if his or her own assets are insufficient.
Interestingly, a QTIP is a gift that gives in return, especially when you want to disinherit the IRS.
Here is some real tax planning magic.
Say wife has an estate worth $10.86 million and husband has $5,000 in credit card debt. Wife wants to provide for husband, leave the rest to her children at his death and disinherit the IRS out of just north of $2 million in federal estate taxes.
Wife dies in 2015 when the federal estate tax exemption is $5,43 million for each taxpayer. Problem: her husband has insufficient assets to utilize his exemption ... but she is double the limit.
Fortunately, she created a QTIP as part of her estate plan.
Of her $10.86 million, $5.43 million passes to her children and the remaining $5.43 passes to the QTIP for her husband.
All is halcyon in the family between stepchildren and stepfather.
When surviving husband dies, the remainder "value" in the QTIP is added to his taxable estate value and utilizes his otherwise wasted estate tax exemption while it passes to his stepchildren.
Ah, what a beautiful thing it is.
There is much more to the QTIP story that could be told, but I will stop there and let you consult an experienced estate planning attorney to work out the details for your unique circumstances.
Note: This is not a do-it-yourself project.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.
Reference: Investor’s Business Daily (September 4, 2015) “Cut Taxes, Send Assets To Loved Ones After Your Death”