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Estate Planning in Light of a Remarriage - Ensuring the Care of Your Children

by William Hayes

The staggering amount of divorces that occur in today's society is all too well known. Depending upon the circumstances that lead to the break-up of any marriage, one may think that getting into another such arrangement would be out of the question. However, this is not always the case. In fact, the Stepfamily Association of America reports that about 43% of all marriages are remarriages for at least one of the adults, and of these, about 65% involve children from a prior marriage.

The numbers may be surprisingly high, but how do they relate to estate planning? Well, the government provides married couples with a powerful benefit called the Marital Deduction. This allows the estate of a decedent to take a deduction for all assets passing to a surviving spouse, thereby deferring the estate taxation of those assets until the survivor's death. However, in order to qualify for the Marital Deduction, the transfer to the spouse must be in a certain form, allowing the spouse certain access to the assets. In recent past, this meant a surviving spouse was required to have unfettered control over the deceased spouse's assets. Inevitably, where one or both spouses had children from a prior relationship, a considerable estate planning dilemma would arise: How does one provide for a new spouse in a form which qualifies for the Marital Deduction, while assuring that one's children do not forego an inheritance? Luckily, The Economic Recovery Tax Act of 1981 provided married taxpayers with such a means with the introduction of a now common estate planning vehicle called the Qualified Terminable Interest Property Trust ("QTIP Trust").

QTIP Trust TermsIn short, a QTIP Trust is created to provide a surviving spouse with limited access to the decedent's assets during his or her lifetime, while assuring that the remaining assets are left to the decedent's children from a prior relationship upon the spouse's death. To qualify the trust assets for the Marital Deduction, the following requirements must be met:

1. A decedent must create the trust for his or her spouse.2. The trust assets must be used for the sole benefit of the surviving spouse during his or her lifetime.3. The surviving spouse must be entitled to the entire income from the trust assets, payable at least annually. 4. The decedent's executor must make an irrevocable election to treat the trust assets as "qualified terminable interest property".A spouse may be given more access to the trust assets, but not less. For example, the QTIP Trustee can be given the discretion to distribute trust principal to the spouse for his or her health, education, maintenance or support. However, keep in mind that the more access allowed to the spouse, the less amount the decedent's children may receive upon the surviving spouse's death.

QTIP TrusteeThe Trustee of the QTIP Trust has the significant responsibility of managing the trust assets. He or she is in charge of distributing the trust income to the surviving spouse, and, if such a provision is included, he or she is also accountable for making discretionary principal distributions to the surviving spouse. Therefore, whomever is chosen to be the Trustee of the QTIP Trust plays a vital role in carrying out your ultimate goals.

You may choose to name your spouse as the Trustee of the QTIP Trust if you are sure your spouse will act responsibly with the trust assets. A better solution may be to name your spouse and your children as Co-Trustees, thereby requiring them to work together to make sure all interest are guarded. However, this depends greatly upon your children and your spouse's ability to collaborate. A final option is to name a third party (either an individual or a corporate Trustee) as the Trustee of the QTIP Trust. This will assure the availability of an unbiased purveyor of decisions.

It is always important to be sure that your loved ones are properly cared for after you are gone. Be prepared for the special planning required when faced with a remarriage. A QTIP Trust may be the vehicle to assure that your estate planning goals are met. Take advantage of the benefits offered to you by the federal government. The QTIP Trust allows you the peace of mind to know that your children will receive an inheritance, that your spouse will be supported during his or her lifetime, and that your estate takes advantage of a valuable tax deferral device. Meet with a qualified estate planning attorney who is familiar with the unique planning needs that go hand in hand with a remarriage to see if a QTIP Trust is right for you.

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