Cut Taxes, Send Assets To Loved Ones After Your Death

FROM NASDAQ.COM

The facts of life include remarriage. Almost 42 million adults in the U.S. have been married more than once, up from 22 million in 1980, according to the Pew Research Center.

For older Americans, remarriage can pose estate planning problems.

Those challenges can also mess up your retirement planning .

Even for couples who share children, potential remarriage might be a concern. And even if remarriage isn't a concern, your surviving spouse may need help protecting assets from overspending and scam artists.

So how can you provide for a surviving spouse yet still leave your wealth to children from a prior marriage?

Suppose a hypothetical Al and Beth Boyd have kids and grandkids. Boyd is concerned that he'll die first and pass on his wealth to Beth, who'll remarry. Boyd's wealth might wind up with strangers.

One solution: use a qualified terminable interest property (QTIP) trust . When the first spouse dies, assets pass to the trust.

There's usually no estate tax if certain key conditions are met. The surviving spouse must be a U.S. citizen, for instance.

And the surviving spouse must be entitled to all of the trust income. That income must be paid out at least once a year.

Those payouts must go on for the survivor's lifetime. No one else can receive trust distributions during that period.

The trust creator also can give the trustee some flexibility. In addition to income, distributions of principal to the survivor might be allowed to pay normal living expenses and needed medical bills.

No matter how many benefits are granted, the surviving spouse must not control the QTIP assets.

Having The Last Word

Suppose Carl Davis marries Ella Ford. Both have children from a prior marriage. Davis dies and leaves most of his wealth to a QTIP trust for Ella.

Ella will have cash flow for life. But she can't name new beneficiaries who'll get the QTIP assets after she dies.

Instead, the QTIP assets will pass to beneficiaries named by Davis, such as his children. Those assets will be taxed in Ella's estate.

Both spouses can set up QTIP trusts.

Some formalities must be observed to get these results. As the trust creator, you must authorize your executor to finalize your QTIP choice, or election, after your death. Both federal and state elections may have to be made to get full estate tax deferral.

Your family should understand the goals of the QTIP to cut discord after your death.

Your spouse will be able to count on lifetime distributions to maintain a familiar lifestyle. And your children will realize they'll inherit your wealth, which won't be squandered or given away by a stepparent after your death.

Keeping The Peace

But a QTIP trust can cause problems. The surviving spouse may want the trust fund to be invested for income. In fact, the survivor can demand that the trustee sell assets that don't produce any cash.

The children, though, may want the QTIP assets invested for growth. So you should choose a trustee who can keep the peace among beneficiaries.

Tax deferral also can mean inheritance deferral. If your surviving spouse lives long after your death, your children will have to wait for any QTIP payout.

So you might want to carve out assets for immediate bequests to your descendants. Or provide for them with life insurance that will pay at your death.