You may want the best for your spouse – even after you’ve passed away. In that unfortunate turn of events, you may even want them to find companionship with someone else. But you probably don’t want that new companion – or their kids – to end up with the assets that you’ve left for your own family. Even if your spouse would never touch that inheritance for someone else, the assets could be subject to a divorce or estate proceeding. Or your spouse could be so taken by a cabana boy (or girl!) that all prudence goes out the window.
Whether the subject of a legal claim or the whims of romance, without careful estate planning, assets intended for your spouse and children can end up in the hands of people you’ve never even met. Fortunately, you can prevent a stranger from getting their hands on your family’s inheritance with the help of a common strategy.
Protecting Assets with Trusts
Instead of leaving all your assets to your spouse outright, you can leave the assets to a trust for your spouse and your kids. This protects the assets from being seized in a divorce or estate proceeding or from being misused through undue influence.
There are two types of trusts that are commonly used for this purpose: A QTIP Trust and a Credit Shelter Trust. While both trusts provide asset protection, they each have different tax characteristics. The QTIP Trust and the Credit Shelter Trust are commonly used in combination in order to create the optimal tax result.
The Qualified Terminable Interest Property Trust (sometimes called a “Marital Trust”) requires the payment of income generated by trust assets to be paid out to your spouse during their lifetime. Depending on how the trust is set up, principal can also be paid out to your spouse. During your spouse’s lifetime, no distributions can be made from the trust to anyone other you’re your spouse, so no distributions can be made to your kids from the QTIP Trust during your spouse’s lifetime. When your spouse passes away, the remaining assets in the trust are paid out to your children (or other beneficiaries you specify in the trust document). One benefit of the QTIP Trust is that assets left to the trust qualify for the estate tax marital deduction, meaning that those assets are not counted as part of your taxable estate. Rather, they are included in the value of your spouse’s estate when they pass away.
Credit Shelter Trust
Also known as a ‘bypass’ or ‘family’ trust, the assets in this trust can be used for either your spouse or your kids, so it is more flexible than the QTIP Trust. And, unlike the QTIP Trust, assets left to the Credit Shelter Trust are included in your taxable estate – and not in the estate of your spouse. When your spouse passes away, the remaining trust assets are distributed to your children (or other beneficiaries).
Choosing a Trustee
If it’s a first marriage, the surviving spouse is often named as the trustee of the trusts because there is minimal concern that there will be a conflict between the surviving spouse and the children. In second marriages, a third party may be chosen to administer the trusts in order to avoid creating a conflict.
Ensuring that your family’s wealth is preserved for the long term requires thoughtful planning. An experienced estate planning lawyer can help you navigate the right strategy for you and your loved ones.
There is a reason that our community of clients here in New York strongly recommends us: We ensure that we provide only the very best estate planning services for our clients and their families and friends. With two centrally-located offices in the heart of New York City, we are prepared to help with your estate planning needs and your legacy planning. Contact us today to schedule a consultation and find out more.