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Living with Your Will

It can be difficult for your spouse to live with your will. And I don't mean your delightfully domineering personality. I'm referring to the typical ways we dictate the control and passage of wealth after we're gone.

I recently struggled to help a widow pass her husband's estate to their children. That's exactly what he wanted, but the marital trust provisions in his will are in the way. The real shame is that, if you're married, your will likely contains similar provisions.

I attribute the problem to 1981 tax legislation that created an unlimited estate tax deduction for property left to your spouse. Previously, you could leave up to one-half of your estate to your spouse without tax. The other half was taxed regardless of the lucky inheritor's identity.

Everyone cheered the proposal to allow unlimited property transfers between spouses. However, members of the bankers and lawyers associations raised a concern. They suggested that few people would be willing to take advantage of Congress' largess for the extra half. Why? What if the surviving spouse remarries and leaves the results of your hard work to a new spouse or children from a second marriage? People may be comfortable taking that risk with half of their property, but will they risk it all?

Enter the QTIP

In response, Congress authorized a new entity. The Qualified Terminable Interest Property trust (affectionately known as the "QTIP") was born. Since then, QTIPs have become a staple of testamentary planning and seem to find their way into just about all married couples' wills.

Congress imposes only a few constraints on QTIPs. The surviving spouse must be the only beneficiary and must receive all income annually for life. When the survivor dies, the QTIP property is subject to estate tax as if it is part of the survivor=s estate. Beyond that, the terms basically are up to the creator or, more realistically, the drafting attorney. This is where the plot thickens.

The QTIP's creator can specify who receives the principal of the trust upon the surviving spouse's death. That's the key appeal, because it assures you that your heirs get the dough, not your spouse's potential newfound love and his/her rug rats. Attorneys, who are intent on looking out for your property interests, inevitably restrict your spouse's rights in order to maximize what's left for your heirs.

QTIP Problems Surface

That's fine. After all, it is your property. But, let's think about the results, which are beginning to surface as the early vanguard of the QTIP generation begin to "tip over," as one of my associates refers to the event that causes a will to "mature."

The widow mentioned above recognized that the future estate tax bill on the QTIP property is rising due to successful investing. She wants to make lifetime gifts to reduce the tax. Also, the kids have financial needs that she would like to satisfy. But, she ran into a brick wall. The tax law prohibits QTIP distributions to the kids. Furthermore, the trustee refuses to distribute principal to her because her husband's will permits distributions only for her health, support and maintenance. Supporting the kids and estate tax planning are not included.

Just like her husband, she wants to maximize what will pass to their children. Unfortunately, her husband's QTIP blocks her efforts. It gets worse. The trustee controls her financial affairs. She detests explaining her living expenses to a bank trust officer whom she hardly knows. (At least her husband didn't name the kids or one of his drinking buddies as trustee. She says that would be downright embarrassing.) She's stuck with this arrangement for the rest of her life. And, she's beginning to wonder why her husband didn't trust her to do the right thing with what they built over the course of a prosperous and happy marriage.

My concern is that this widow's dilemma will become the norm, not the exception. Rightly or wrongly, lawyers like to point out the worst case, namely that your spouse may leave everything to some bum you don't even know. Sure, that's possible, so the knee-jerk reaction is to use a QTIP.

However, let's be realistic. Even if your spouse remarries, will she love your kids less and disinherit them? If I tip over early, I actually hope my wife finds happiness elsewhere. I don't begrudge her the ability to share some of "my" wealth as she deems appropriate. Heaven knows she earned that right after raising our kids and putting up with me! And, I doubt that I'll be bothered by her decision after I'm gone. The alternative of tying her hands and preventing her from being responsible for both her and our kids' financial destiny is simply not acceptable to me.

QTIP Compromises

I know it's not always that simple, especially in second marriages where there are kids from prior marriages. It also is complicated by a desire to keep your family's business in the bloodline. But, please think about it. Perhaps there are appropriate compromises. Consider authorizing the QTIP trustee to make distributions to your spouse for use in lifetime estate planning. Leave part of your estate to your spouse outside of the QTIP so that there will be some flexibility. Use a buy/sell agreement to provide protection from the risk that the stock finds its way outside of your bloodline.

Your will can be a final expression of your love and trust, or a straight jacket designed to control from the grave. The choice is yours. But, consider the possibility that going to an extreme to protect your wealth from the family may be contrary to the reason you are protecting it in the first place . . . like your family's financial and emotional well being.

 

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