The most common goal of an estate plan is to provide for loved ones in the event of the death of the plan creator. Providing for loved ones is not as simple as gifting assets to them in a Last Will and Testament through. Considerable thought must go into what you leave behind and what legal mechanism you use to transfer the asset to ensure maximum benefit and minimum tax exposure. If you have children from a previous marriage, creating an estate plan is even more complicated. One tool you may wish to consider incorporating into your plan is a QTIP trust.
Trusts come in many forms; however, the basic concept of a trust remains the same. A trust allows you (the trust creator) to designate assets that will be managed by a person or entity (the trustee) for the benefit of a third party (the beneficiary). A Qualified Terminable Interest Property, or QTIP, trust is a specialized type of trust that allows you to retain a certain degree of control over trust assets as well as defer gift and estate taxes if you choose to do so.
A QTIP trust is an excellent tool to include in your estate plan if you have children by a previous relationship because it allows you to provide for your current spouse while still gifting assets to your children eventually. Assets transferred into the QTIP trust are not actually gifted to your current spouse when you die. Instead, your spouse receives income from the trust assets but cannot withdraw the principal from the trust nor can he or she decide on the ultimate disposition of the trust assets. In the case of real property, your surviving spouse may also receive a “life estate” in the property, meaning that he or she may remain in the home until death, but will never own the property outright. When your surviving spouse dies all assets held in the trust are then transferred to the intended beneficiaries, typically children from a previous marriage.
Another benefit of a QTIP trust is that gift and estate taxes can be deferred when you die by using the unlimited marital deduction. Gift and estate taxes are not avoided altogether but are deferred until the death of the surviving spouse. A QTIP trust actually allows your executor to elect to defer gift and estate taxes or not by using or foregoing the marital deduction. Because tax laws change frequently, the ability to elect or forego the marital deduction a beneficial tax planning tool.
Consult with your Missouri estate planning attorney if you believe that a QTIP trust would be a beneficial addition to your estate plan.
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