The holiday season has come and gone. If you made a resolution, at the beginning of the year, and are still sticking to it, you are a rare bird. According to a recent study most gave up on the dream on January 12. Some of you may have gone home to visit your parents for the holidays. Some of you stayed home and had a yours, mine, and ours family holiday. Because you wanted to make sure it was a wonderful holiday season, you planned what to buy each person. You made sure everyone received a great gift. Now it’s time to plan beyond the holidays.
If a person is married and has children from a previous marriage plus children or stepchildren from his or her current marriage, that family is considered a blended family. For those who wish to pass their wealth on to all of their biological children but also provide for their spouse and perhaps any stepchildren, estate planning can get tricky. Two estate planning strategies to consider involve a qualified terminable interest property (QTIP) trust and an irrevocable life insurance trust (ILIT).
A blended family requires smart estate planning
If you’re married and have children from a previous marriage plus children or stepchildren from your current marriage, your family is considered a blended family. And because you’ll likely wish to pass your wealth on to all of your biological children but also provide for your spouse and perhaps any stepchildren, estate planning can get tricky. Two estate planning strategies to consider involve a qualified terminable interest property (QTIP) trust and an irrevocable life insurance trust (ILIT).
QTIP trust: The upside and downside
One of the most effective estate planning tools for blended families is a QTIP trust. This trust is designed to qualify for the estate tax marital deduction, so that assets you transfer to the trust aren’t taxed when you die.
Unlike an ordinary marital trust, however, a QTIP trust provides your spouse with income for life but can preserve the principal for your children from your previous marriage. The trust assets are includible in the taxable estate of the second spouse to die.
Under the right circumstances, a QTIP trust is a great tool for balancing competing estate planning goals and preserving family harmony. But in some cases — particularly when one spouse is considerably older than the other — it can hinder estate planning efforts.
For example, Pete and Kim got married 10 years ago and have two children, ages six and four. Pete is 50 and has two children from a previous marriage, ages 17 and 24. Kim is 34 and this is her first marriage. Pete wants to make sure that Kim and their young children are provided for after he’s gone, but he also wants to share his wealth with his older children. In addition, it’s important to him that everyone in the family feels they’ve been treated fairly.
A QTIP trust would allow Pete to spread his wealth among the family, but it has a big disadvantage: Pete’s older children would have to wait until Kim died to receive their inheritance. And with a relatively small age difference between the children and their stepmother, that could be a long time. Pete worries that such an arrangement would create tension.
ILIT: The alternative
As an alternative, Pete’s advisor suggests an ILIT. The ILIT purchases insurance on Pete’s life, and Pete makes annual exclusion gifts to the trust to cover the premiums. If the ILIT is designed properly, there won’t be any estate tax on the insurance proceeds.
When Pete dies, the ILIT collects the death benefit and pays it out to his children from his first marriage. The older children receive their inheritance immediately, and Pete’s other assets remain available to provide for Kim and the younger children.
Communication is key
Whether you choose a QTIP trust, an ILIT or another strategy, explain your plans — and the reasons behind them — to your children and spouse. Communication is key to maintaining blended family harmony.
If you would like further information or assistance, please contact Bedford, Texas Estate Planning and Elder Law Attorney, Antoinette Bone, at (817) 462-5454 , email info@abonelaw.com, or click here to go ahead and set an appointment :
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.
Nothing in this message is intended to provide legal advice. This message is for educational purposes only.
