A QTIP Trust Gives Income To A Wife But Preserves Assets For Your Children From A First Marriage

If you have children from a previous marriage that you want to leave property to, but still supply income to your current spouse while she lives, then a QTIP trust may be the way to go. It allows you to ensure your legacy to all your loved ones. Here's how it works...



If you've remarried, your current wife may not be enthused about leaving assets to children of your first marriage after you die. So how do you leave assets that you want your current wife to use after you die, but yet guarantee they go to your children after she dies? You can put those assets in a Qualified Terminal Interest Property (QTIP) trust.



The income or use of the assets in the QTIP trust can be used by your wife (i.e. your surviving spouse) for the rest of her life. At her death, the QTIP assets will go to your children of a previous marriage. Typical QTIP property may be income-producing assets or a house you own which you wish to have your wife use after you die.



- Estate tax flexibility of a QTIP trust



When you die, the trust assets can either be taxed in your gross estate or you can leave it to your wife to be taxed eventually in her gross estate at her death. The assets in the QTIP trust will get a stepped-up basis to their fair market value at the death of whoever's estate it's in. The decision to do either can be left to your executor to achieve the best overall tax benefits according to however the estate taxation operates then.



- QTIP requirements for marital deduction



But to transfer the trust to your wife so as to get the estate marital deduction when you die, the trust must be drawn up to fulfill the 'qualified terminal interest' provisions - which accounts for the QTIP trust's name. So, to qualify for the marital deduction as a QTIP the following provisions must be incorporated in it:



* the surviving spouse must receive a qualifying income interest for life with the income being paid at least annually;



* no person may have a power to appoint any part of the property to any person other than the surviving spouse.



* Although the surviving spouse may be granted a power to appoint the property after death, you would explicitly negate that power to ensure that the children of your prior marriage ultimately receive the property, and



* the QTIP property must be income-producing property, or the trust must give the surviving spouse the right to convert it to income-producing property; and the income must be paid exclusively to the surviving spouse, and not to any other beneficiaries.



Since the QTIP is a trust, it'll bypass probate in whose ever estate it's chosen to be in.





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