Gurney's Inn
May 17, 2006

Dollars & Sense

QTIP Trusts Protect Inheritances

In today's world, remarriage is often part of life and, as such, can impact an estate plan and the status of children's future inheritance. For example, if you have children from a previous marriage and your current spouse survives you, he or she could be the one who decides who will next inherit your assets.

A Will May Not Be A Solution

If you leave your estate directly to your spouse, you cannot control the choices your spouse makes in the future. Even if your spouse's current will name your natural children as beneficiaries, nothing prevents a future change. Once a spouse inherits your estate, he or she will have an unlimited legal right to choose other beneficiaries.

QTIP Provides

You may be able to protect your children's inheritance as well as provide for your spouse by setting up a Qualified Terminable Interest Property trust. A QTIP trust will provide your spouse with lifetime income after your death. After the death of your spouse, your children then inherit the trust's assets. The trust will also generally qualify for estate tax deferral via the unlimited marital deduction.

How The QTIP Trust Works

With a QTIP trust, assets are transferred to a trust either during your lifetime or at your death.

The trustee administering the trust has a legal responsibility to invest the assets and to pay lifetime income to your spouse from the trust's investment earnings. Upon your spouse's death, the trust is transferred to the beneficiaries — presumably your children — thus providing your spouse with lifetime income but paying the principal to your children. For estate tax purposes, a transfer to a QTIP trust is treated the same way as a transfer directly to your spouse, so taxes are generally deferred under the unlimited marital deduction. (However, QTIP assets will be included in your spouse's gross estate for tax purposes.)

In addition to providing for your spouse and your children, a QTIP trust can provide another benefit — experienced investment management for your assets. This is especially true if you choose a trustee who is also an investment professional.

Because of the impact that estate taxes can have, a QTIP requires careful planning with your tax and legal advisors. Be sure to consult both if you are considering this type of trust.

For More Information

If you'd like to learn more about a QTIP trust, please write in care of: Michael Pellman, Financial Advisor-Retirement Planning Specialist, Riverhead, NY, 631-284-5213.

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