QTIPs: May Cause Problems Unrelated To Your Ears

QripsThere may, in fact, be a easy plan out there that incorporates every aspect of your blended family’s needs and wants, but a QTIP is not the plan for you if you have an estate tax liability.

Blended families are a fairly normal part of modern life, with both divorces and remarriages becoming quite common. That said, this fact of life accounts for a good portion of the family baggage of modern living and a lion’s share of the estate planning problems. Blended families have some extra concerns and extra problems, especially when each spouse hopes to take care of their own children from a previous marriage. A recent Forbes article explores a particularly strange probate case to prove the point.

Word to the wise: Watch out for QTIPs (and not just because your doctor is worried you will hurt your ear). A QTIP is shorthand for “Qualified Terminable Interest Property.” It is a way to hold property for the surviving spouse that qualifies for the unlimited marital deduction with strings attached so that the first to die’s children are not disinherited.

Of course, a spouse can always give his or her assets outright to their surviving spouse without incurring taxation. In the case of an outright bequest the surviving spouse gets to deal with the outright assets as his or her own property (because it is). But what if you should you die first want to make sure your children ultimately get your share of the estate but you wanted to allow your spouse to have what they need until their own death? What would have otherwise proved to be an excellent planning  strategy lead to the contested probate court case of In the Matter of The Estate of Sydney Stark.

Sydney Stark used the QTIP to leave an apartment to his wife, Sylvia, and then ultimately to his children from a previous marriage.  In this case however, one of the prime advantages of a QTIP, that is, that the assets in the QTIP are included in the survivor’s estate (and therefore received a step=up in basis at the second death) was thwarted by the failure to plan for the estate tax.  Obviously, AB trust planning was what was required to meet the goals and objectives of this couple, not a QTIP.

In the case of a blended family like this one, with Sylvia leaving her assets to her own child of a previous marriage, the poor choice of a QTIP strategy meant Sylvia left an estate tax bill to her own child without the additional assets in the QTIP) to pay the IRS. Why? The QTIP assets passed fully to the children of Sydney Stark. Naturally, Sylvia’s own child cried foul.

You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.

ReferenceForbes (October 14, 2011) “Blended Family Not Like The Brady Bunch – At Least Not in Probate Court


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