As we all know, the typical family from the 1950’s television shows such as “Leave it to Beaver” have become a rarity over the years. A couple celebrating their golden wedding anniversary is not so commonplace. Today, approximately fifty percent of all marriages end in divorce. In the traditional family, estates usually involve wills and the use of “joint and survivorship” ownership between husband and wife or “beneficiary designations” to ensure that upon the death of a spouse everything would pass to the surviving spouse. However, in today’s modern family, there may be a second or even third spouse and children from prior marriages. How does an individual take care of his or her current spouse yet protect his/her children from a prior marriage?
The problem with leaving everything outright to one’s spouse in such a family is that the spouse may presumably leave everything to a new spouse or to their own children upon their death, leaving the children from one’s prior marriage with nothing. Even providing for one’s children in one’s will may not solve the problem because in Ohio a surviving spouse has certain statutory rights. These include: (1) the first $40,000 of the deceased spouse’s estate; (2) the right to live in the residence one year rent free; (3) the first two vehicles up to a value of $40,000; and (4) the right to take or elect against the will and receive one-half of the net estate, unless two or more of decedent’s children or their lineal descendants survive, in which case it would be one-third. One solution to this problem is to execute a prenuptial agreement before marriage. Each party can waive those statutory rights allowing each spouse to pass on his or her assets upon death as he or she wishes. Another tool is the use of what is called a QTIP Trust (Qualified Terminal Interest Property Trust). A properly drafted QTIP Trust also allows deferral of estate taxes until after the death of the surviving spouse.
A QTIP Trust allows an individual to make provisions for a surviving spouse, yet control the ultimate disposition of property upon the death of the surviving spouse. The income stream from the trust shall be paid to the surviving spouse, but the surviving spouse cannot control the ultimate disposition of the trust assets. The trust may also provide that principal may be used for the needs of the surviving spouse. A QTIP Trust is also an exception to the general rule, that to qualify for the marital deduction (exemption from estate taxes) an asset must be given outright to a surviving spouse or put in a trust in which the spouse may withdraw all of the principal. To qualify for the marital deduction, the trust income must be paid to the surviving spouse on no less than a yearly basis and during the spouse’s lifetime. No person, including the spouse, is permitted to transfer or appoint any trust property to anyone other than the surviving spouse. The creator of the trust may choose to also allow the trustee to distribute principal of the trust to the surviving spouse, if necessary, for his or her health, maintenance and support.
The advantages of a QTIP Trust are that the surviving spouse is provided for, the deceased spouse controls the ultimate disposition of the property, and the marital deduction can be utilized resulting in the deferral of estate taxes until after the death of the surviving spouse. Although complex, a QTIP Trust can be an important part of an estate plan where the primary objectives are to have flexibility in the timing of estate tax payments, along with an assurance that the remaining trust assets will pass to your children or family. One important caveat is that for a QTIP Trust to qualify for the marital deduction, the surviving spouse must be a U.S. citizen. If not, other estate planning tools are required. If you are considering utilizing this type of a trust, discuss its appropriateness with your financial planner, accountant and estate planning lawyer.
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Joseph E. Balmer
Joseph Balmer manages the Probate, Trust and Estate Administration department at Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has been certified by the Ohio State Bar Association as a specialist in Estate Planning, Trust and Probate Law since 2006.