There are numerous different types of legal devices that can be used in the field of estate planning. It is unrealistic to expect a layperson to be aware of all of them. This is one of the reasons why it is important to work with a licensed estate planning attorney when you are making preparations for the future.
Different circumstances will call for different courses of action, and there is the “right tool for the right job.” With this in mind, let’s look at the QTIP trust.
Protecting Children From a Previous Marriage
QTIP is an acronym that stands for qualified terminable interest property trust. These trusts are useful for those who are remarrying who have children from a previous marriage.
If you just allow all of your assets to become c0-mingled property after you get remarried, you have no way of knowing how your new spouse would distribute the assets after you die. For one reason or another, your children could ultimately be left out in the cold.
A QTIP trust is used to account for this type of situation. It would be possible to create a premarital agreement prior to remarrying that defines the personal property of each person entering the marriage.
Once you have established ownership of your personal property, you convey assets into the QTIP trust, and your surviving spouse is going to be a beneficiary with limited rights.
You name a trustee to administer the trust. To avoid conflicts of interests it could be a trust company or the trust department of a bank.
After you die, your surviving spouse would be able to receive monetary distributions from the earnings of the trust. The surviving spouse would typically not have access to the principal, but you have the ability to stipulate the details.
If your estate were exposed to the federal estate tax, it would not be applied while your spouse was still alive. This is because of the existence of the unlimited marital estate tax deduction. Asset transfers to your spouse are not subject to the estate tax.
When you create the trust agreement, you also name secondary beneficiaries who would assume ownership of the assets that have been conveyed into the QTIP trust after the death of the surviving spouse. If the point is to protect your children from a previous marriage, you are going to name your children as the beneficiaries.
After your spouse dies, the children do in fact inherit the assets that remain in the trust.
While your surviving spouse is living, he or she does not have the power to alter the terms of the trust, so you can be certain that your children will be provided for after the death of your surviving spouse.