The now iconic TV show The Brady Bunch depicted what was, at least at the time, a very unusual family dynamic: a second marriage bringing together six children under one roof.
These days it’s hard to imagine a show like The Brady Bunch even raising an eyebrow. Indeed, with upwards of half of all marriages ending in divorce, households full of brothers and sisters who don’t share the same biological parents are hardly out of the norm.
The increasing prevalence of this sort of mixed-family situation, whether due to divorce or the death of a spouse, poses some estate planning challenges. How, for instance, can you ensure that your children from a first marriage aren’t disinherited should you pass away and your second spouse remarry and start a new family?
The Qualified Terminable Interest Property trust, or QTIP, can be a powerful way to ensure that assets built-up over a lifetime end up where you want.
When the assets from a decedent are transferred to a trust that is irrevocable on their death, the assets are generally protected from creditors, bankruptcies, or second marriages. It’s a way to help protect the surviving spouse and the remaining children, so that the surviving spouse could remarry and not redirect the assets away from the decedent’s children.
Securing Your Wishes
Sticking with The Brady Bunch analogy, here’s how the QTIP, which is a type of a marital trust, works: Let’s say Carol Brady, the mother, brought several million dollars into her marriage to Mike.
Assume that Carol wanted to ensure that, should she die first, her widowed husband would be taken care of and her three daughters would inherit the bulk of her estate. One option would be for Carol to take advantage of the unlimited marital deduction, which allows a husband or wife to pass their entire estate, no matter how large, to their spouse without getting hit by the estate tax—which, in 2018, kicks in when assets total more than $11.18 million (pending confirmation by the IRS).
It would be understandable if Carol was leery about handing over her estate and its eventual disposition entirely to Mike; he had been married before, after all, and who knows what his future circumstances might hold? A QTIP trust would provide the perfect solution. When Carol dies, her assets would go into the QTIP and would generate income for Mike to take care of his living necessities. Upon Mike’s death, the remainder of the estate would then go to the three Brady girls, just as Carol wished.
Estate Planning/Asset Protection and Tax Issues
While important, ensuring that children from a prior marriage get an inheritance isn’t the only reason to use a QTIP. Indeed, the core purpose of a marital trust like a QTIP is to provide support to the surviving spouse. Let’s take the case of a couple in which the surviving spouse— the wife—was a physician.
The reality of today’s world of medicine is that the doctor would always be threatened by the possibility of litigation; therefore, the couple drafted a QTIP trust. It was a move that ultimately eliminated what could have been a lot of anxiety after the doctor’s husband died and the husband’s assets were left to the wife in a QTIP trust. Why? The doctor was named in a lawsuit against the hospital where she had worked. But no matter what had come of the litigation, the assets in the marital trust were protected from that kind of claim.
A QTIP also provides estate tax advantages. Because it’s a tax-deferral technique, it allows for the entire estate from the decedent’s spouse to be untaxed until the surviving spouse’s death.
If you have questions about how to handle your finances amid a second marriage, and would like to explore a QTIP as a strategy, the professionals at Krietzberg Wealth Management can help. Reach out to us at 732-383-2064.
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Curtis Krietzberg, David Krietzberg are registered representatives of Lincoln Financial Advisors Corp.Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. It is not our position to offer legal or tax advice.
Krietzberg Wealth Management is not an affiliate of Lincoln Financial Advisors. CRN-3578943-050521.