In developing estate plans for individuals who have remarried, we often see a need to help the individual provide income for the spouse while attempting to preserve assets for the children after the surviving spouse subsequently passes away.
Typically, property passed from one spouse to another upon death is not subject to estate tax because it falls under the protection of the ‘martial deduction’. This deduction is unlimited in amount so the surviving spouse will not owe estate taxes; however, it will be subject to estate taxes when the surviving spouse dies. The property allowed to transfer under the marital deduction must not be a ‘terminable interest’.
A terminable interest occurs if the ownership interest terminates during the surviving spouse’s lifetime. There is an exception to this rule, known as the Qualified Terminable Interest Property (QTIP). If properly structured, there is no estate tax due on QTIP property when the first spouse dies, even though the surviving spouse may have inherited a terminable interest.
The most common scenario for this planning strategy is to preserve assets for the children of the initial marriage while providing income to the second surviving spouse while prolonging estate tax until the second spouse dies. There are several requirements that QTIP property must meet. For more information on estate planning in the Greater Baltimore area, please contact Stouffer Legal at 443-470-3599.