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Avoiding estate fights if parent remarries

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Quite literally, the creator of the QTIP trust has control of his or her assets from the grave. State trust laws vary, but the QTIP works by rolling over the children's assets into the surviving spouse's estate and naming them as final beneficiaries.

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Through this method, the children don't have to pay a gift tax and receive estate tax exemptions up to $1 million. When the stepparent dies, the cash goes where the parent wanted it to go.

"Through a QTIP trust, the surviving spouse would be entitled to the said income for their lifetime with the remainder going to the children," Silver says.

However, if a 70-year-old parent married a 30-year-old, a QTIP is not a good choice. After all, the children cannot receive the assets if the stepparent outlives them. Scott Sherman, counsel at Reed Smith LLP, recently had this challenge with an elderly celebrity who married a man half her age.

Before the woman passed, Sherman set up an irrevocable living trust, which cannot be changed or canceled once it is set up without the consent of the beneficiary. It held up in court when the young stepfather challenged it.

To avoid gift taxes with an irrevocable living trust, Sherman says to have the parent retain limited power of appointment. This keeps the assets from being a completed gift, and "it counts in his estate at death," he says. "Now he can't transfer anything because the assets belong to the trust."

Children can also work with their parents to set up a revocable living trust. Silver says the parents can do whatever they want in terms of adding to it, taking from it, amending it or altering it.

"If a parent feels that they want a second pair of eyes, they can always put their children as designated or interested parties on a particular account so that they can see what's going on in that account," Silver says.

Silver says a spouse can transfer an unlimited amount of money without any tax consequence. That's why it's imperative the children gain access to the parent's accounts, Sherman says.

"You see that dad has $1 million and suddenly there's a $400,000 payment somewhere and it's down to $600,000, you can at least investigate," Sherman says.

Who wins?
When these cases go to court, more often than not, the stepparent wins, says Weidenfeld.

"These court battles go on interminably and turn into a psychodrama that is a 'Who did daddy love the most? Me or the wicked witch he married after mother?'" Weidenfeld says. "I've seen kids absolutely devastated by not having expectations met."

Sometimes the wrong person is named as a primary beneficiary or the trust doesn't name the contingent beneficiary after the primary is deceased, LaVigne says.

"It's extremely important that people understand exactly what they're doing when they set up any type of a payment option and don't leave flexibility for the people who are left behind to make amendments postdeath," LaVigne says.

Bankrate.com's corrections policy -- Posted: Sept. 11, 2007
 
 
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