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Utilizing “QTIP” Trusts for Families in Second Marriages

Utilizing “QTIP” Trusts for Families in Second Marriages

Estate planning in second marriages can be especially complicated when trying to secure the well-being of loved ones from a previous marriage. Much of the complexity arises from rights granted to a surviving spouse. In Ohio, spouses (male or female) are entitled to dower and elective share rights that often create tension between children from a prior marriage and your second marriage partner.

However, most of these uncomfortable tensions can be avoided through careful estate planning, which often includes a QTIP (or, Qualified Terminable Interest Property Trust). Such an arrangement is especially effective in providing for children from a previous marriage.

Consider the following example:

Let’s say Michael dies while married to his second wife, Kathy. Michael loved Kathy, but out of concern that she might not take the well-being of his children from a previous marriage into account, he established a will that left most of his estate (worth about $12 million including a marital home) to his children. He did, however, bequeath his $100,000.00 IRA entirely to Kathy.

And here is where things become complicated…

Unfortunately, Kathy then dies a week later intestate (without a will), so Michael’s hard-won IRA is automatically transferred to Kathy’s closest relative – her idiot brother, Frank. Because Kathy was entitled to the marital home through Ohio’s spousal rights, the marital home also transfers to Frank. The kids end up with hardly anything. Had Michael properly planned, he could have protected his children’s inheritance, provided income for his wife, and saved considerably on taxes.

QTIP Trusts

In the example above, Michael could have provided for both his children and Kathy had he created a QTIP trust or proper will.  Qualified Terminable Interest Property Trusts are commonly referred to as a “Family Trust”, or “Marital Trust.”  A QTIP Trust subdivides into (A) marital and (B) family Trusts: the B Trust preserves the children’s interest by restricting the spouse’s access.  The remaining spouse receives income and a life estate that satisfies Ohio’s spousal rights.   After the second spouse dies, the children receive the remaining assets in the B Trust.

Consider another version of the above example:

Instead of ignoring Ohio’s marital election, Michael plans ahead and created a revocable living trust with a QTIP election.   Upon Michael’s death, his trust is sub-divided into an “A” and a “B” trust.  Here, $5.43 million of his estate is diverted to his B trust.  Kathy is the beneficiary of this B trust, with limited access and receives income from the trust.   Because this trust is under the federal estate tax limit, Kathy’s estate tax is $0.00.  Over the next 20 years, because of robust growth, the “B” trust is now $17 million.  Upon Kathy’s death, trust “B” passes to the Michael’s sons entirely estate tax free.

The remaining $6.57 million in assets are diverted to the “A” trust.  Kathy again has restricted access, but can use these funds for her health, maintenance and support.  When Kathy has expenses, she uses the “A” trust and saves the “B” trust only for dire necessities.  Upon her death, the “A” trust has been reduced (or eliminated) and the tax is minimal, if there is any at all.  The remaining balance of the “A” trust passes to Michael’s sons.

QTIP trusts are very popular for people in second marriages.  As you can see, the trust provides income for the remaining spouse, yet it preserves your children’s assets.

Prenuptial Agreements

A QTIP trust may not fit under certain circumstances.  In cases where there is a disproportionate estate among spouses, a prenuptial agreement may be considered.  Certain statutory rights of a decedent’s surviving spouse may be waived by a valid prenuptial agreement.  In other words, people may contract for anything in life.  This includes signing away your inheritance.

It’s important to remember that a prenuptial agreement may often bring tension among couples.  Also, although Ohio recognizes prenuptial agreements to be valid, the state also does not allow you disinherit your spouse.   In that regard, oftentimes antenuptial agreements are coupled with estate plans to provide some form of financial security for the surviving spouse.

Prenuptial agreements are valid and enforceable (1) if they have been entered into freely without fraud, duress, coercion, or overreaching; (2) if there was full disclosure, or full knowledge and understanding of the nature, value and extent of the prospective spouse’s property; and (3) if the terms do not promote or encourage divorce or profiteering by divorce.

Prenuptial agreement agreements are a great tool when coupled with a QTIP trust.  When combined together, the surviving spouse is provided income and preserved an estate for his or her lifetime.  In addition, the children’s inheritance is given extra protection in case of divorce.

Summary

QTIP trusts and prenuptial agreements are two of many ways to provide security for your spouse and children.   Through proper estate planning, you can provide a steady stream of income for your spouse and preserve your children’s inheritance.  It’s important to consider all options when preparing your estate plan.   For more information and or questions, contact attorney Dan Baron at Baron Law LLC – 216-573-3723.

 

 

 

 

 

 

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How Will Trump’s Presidency Affect Your Trust?

How will Trump’s Presidency Affect Your Trust?

With the impending inauguration of Donald Trump as our nation’s president, we would all be wise to prepare for a more conservative economic landscape that will likely include the elimination of some gift and estate taxes, lower overall rates, and new deductions. Particularly, if Trump moves forward to repeal the estate tax, many questions surface around the tax consequences within family trusts.

Whether you currently have or are thinking of establishing a trust, here are some important considerations going into the next year with our new president.

Federal Estate Tax

Trusts are an important estate planning tool for avoiding probate, protecting assets, and Medicaid planning.  For people with larger estates, trusts are also an effective way to save money on taxes. For example, commonly used A – B and QTIP trusts allow you to divide your estate into several sub-trusts to avoid the federal estate tax of forty percent (40%). However, Trump’s proposed repeal of the current federal estate tax could eliminate this estate tax entirely.  Thus, notwithstanding the other benefits of a trust, the new proposal would limit the need for a trust. This could mean savings upwards of $268 billion over the next ten years, collectively, for those with larger estates.

Marital Exemption

It’s important to keep in mind that Trump has no interest in changing the unlimited marital exemption that is currently in place.  For example, let’s assume Henry and Wilma have an estate worth $10 million.  Henry dies leaving Wilma the entire estate.  Even before Trump’s plans are proposed, the entire $10 million would pass to Wilma, estate tax free.  In other words, Wilma would receive the entire amount and not have to pay a 40% tax. Wilma avoids paying any tax because our current laws allow for your entire estate to pass tax free to your spouse.

Advantages of a Trust

Less than five percent of Americans would be affected by Trump’s estate tax proposal.  However, there are numerous non-tax related benefits for having a trust as part of your estate plan.  The biggest advantage is that trusts allow your loved ones to avoid probate.  Under Ohio law, an estate caught up in the probate process will likely be trapped there for a minimum of six months, and ultimately could take years to administer.  A trust eliminates the need to go through the probate court and keeps your estate private.

Other Types of Trusts and their Advantages

There are many different types of trusts that can be beneficial under specific circumstances. For example, a charitable trust is a unique tool used to establish your legacy with a charity while saving on your income taxes. Charitable trusts can effectively remove you from a higher income tax bracket and provides income over your lifetime.  Revocable and irrevocable trusts are another form that might help provide protection against creditors, Medicaid, and law suits.  And finally, special needs trusts might help protect your special needs child or family member.

In sum, regardless of the changes implemented by our new administration, establishing a trust remains an effective way to save time, money, and to avoid prolonged probate headaches for your loved ones. Furthermore, not only does a trust help avoid the probate process, it also protects your assets against opportunistic creditors and other litigative perils.  Most importantly, a trust ensures the right people inherit your legacy, and that nothing can be claimed by the State.

Join us for this FREE workshop to learn more about the benefits of trusts and other asset protection tools.

Update: This workshop is no longer available; therefore we have removed the link to the event workshop. 06/2019

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Advantages of Establishing a Trust

There are many estate planning tools out there.  But simply put, a trust is an estate planning tool that allows you to plan in advance.  A trust allows you to control your assets even after your death and may allow for certain tax advantages as well as privacy and the avoidance of probate.

There are many different types of trusts and each is used under specific circumstances.    For example, a charitable trust is a unique tool used to establish your legacy with a charity while saving on your income taxes.  Revocable and irrevocable trusts are another form that might help provide protection against creditors, Medicaid, and law suits.  And finally, special needs trusts might help protect your special needs child or family member.

The main difference between a will and trust is that only a will passes through probate.  However, through a trust, your assets will pass to your loved ones privately and does not involve the probate court.  Through a will the probate court oversees the administration of the will and ensures the will is valid. The court will then also administer the property making sure it gets distributed the way you intended.   One disadvantage of a will is that all information and transfers through a will are public, and are reported with the state.

If the court authenticates your will, it will pass through probate reaching your intended beneficiaries.  If the will is not authenticated, your money might end up with the state, instead of your loved ones.  Comparatively, courts do not need to oversee the distribution of a trust, which can sometimes save time and money.

Another benefit of having a trust is that a trust takes effect as soon as it is created.  Comparatively, a will takes effect only after you die.   Through probate, a will determines who will receive your property at your death and it appoints a legal representative to carry out your wishes.  This person is called the Executor.   In comparison, a trust may be used to distribute property before death, at death or afterwards.  A will covers any property that is only in your name when you die. It does not cover property held in joint tenancy or in a trust.

In sum, if you want to effectively save time, money, and headache for your loved ones then you might consider establishing a trust.  A trust avoids the probate process and protects your assets against creditors and lawsuits.  Most importantly, a trust ensures the right people inherit your estate, and that nothing is left with the State.  Contact Cleveland, Ohio estate planning attorney Dan A. Baron for a free consultation.    Contact our Cleveland, Ohio office today at 216-573-3723.

 

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New Changes in Ohio’s Power of Attorney Laws

If you’re an Ohio resident concerned with the medical care of a loved one, you should be familiar with Ohio’s laws regarding power of attorney.

A financial power of attorney, also known as a durable power of attorney, is a legal document an individual (the “principal”) can use to appoint someone (the “agent”) to act on his or her behalf.  This authority can be used for financial, business, and health matters.   Most often, this authority is used when an individual becomes unable to handle his or her own affairs.

There have been several changes that Ohio has adopted affecting these powers.  Effective March 22, 2012, Ohio adopted the Uniform Power of Attorney Act, or UPOAA.   UPOAA focuses on preventing financial elder abuse.  The law now includes a statutory form with language designed to help prevent agents from abusing their power.  Put simply, the law now demands power of attorneys to be more specific and provide specific “hot powers.”

Since this new law, third parties such as a financial institution are not required to honor a general power of attorneys.  Now, the law asks that a power of attorney include specifically which types of assets and accounts the agent is allowed to control.

A power of attorney created before March 22, 2012 will still be valid; however, ask an attorney to review it in light of the current law and consider using the 2012 statutory power of attorney form.   In sum, UPOAA prohibits agents from performing certain acts unless the power of attorney specifically authorizes them.  Because financial power of attorney documents give significant powers to another person, they should be granted only after careful consideration.

To learn more about drafting a power of attorney, contact the law office of Baron Law LLC.  You will speak directly with Cleveland, Ohio attorney, Dan Baron.  Call today at 216-573-3723 to learn more about how Baron Law can help create your estate plan and power of attorney.