You can set up what is called a Bypass Trust (also sometimes referred to as an A/B Trust). It has many uses, one being the protection of wealth from estate taxes. But in this case, it can be used to ensure your assets do not go to your stepchildren. Here are the basics of how it works. You and your spouse set up two trusts; upon death assets are distributed to a marital trust (A), and/or the bypass family trust (B).
When you die, the assets in the marital trust (A), which is revocable, go to your surviving spouse. That individual has control over the assets in that trust. Meanwhile, the family trust (B), which is irrevocable, the assets can be used by the surviving spouse and receive income from it, but the terms of that trust cannot be changed. When the surviving spouse dies, the assets in the family trust typically pass to the first designated beneficiaries. In essence, this type of trust provides control over the distribution of assets even after death.
Alternatively, you can set up A Qualified Terminable Interest Property (QTIP) trust, which is specifically designed for this situation. Benefits include: your surviving spouse receives income for life, and after their death, assets go exactly where you specified.
When should you use one versus the other? In general, of course, we would need to discuss your particular situation. The Bypass trust is preferred for maximizing tax exemptions and passing assets to children while still allowing the spouse to use the assets. The QTIP is preferred when the first spouse wants to lock in final beneficiaries (like children from a first marriage) while ensuring the current surviving spouse is financially supported.
SOME BASICS
While you think about which approach might be best for you, some basic tactics to consider:
- Keep certain assets separate: avoid commingling them if you want to retain control. For example, don’t mix them with joint marital funds. Make sure they are only titled in your name and in your trust.
- Watch your beneficiary designations: that includes your life insurance, retirement accounts like IRAs, 401 (k), etc., and your payable-on-death bank accounts.
SHOULD YOU GO EASY OR COMPLICATED?
Granted, bypass trusts OR QTIPs are more complicated to set up and manage over time, but in certain situations, they can help ensure greater control over assets than standard trusts.
All of this speaks to the need to work with an experienced estate planning attorney like myself, who can guide you through the advantages and disadvantages of various legal instruments available to help you protect your assets and loved ones.
I work with several clients here in Cincinnati who have blended families and recognize the need to be clear and intentional about the “yours, mine, and ours” distribution of assets. However, if for no other reason than to prevent arguments and hurt feelings among your heirs, you do owe it to them to have your affairs in order. It is the loving thing to do. Please call me at 513-399-7526 to schedule a time to discuss your unique situation. I can promise you that together, we’ll work out an estate plan that meets your goals. Meanwhile, visit www.davidlefton.com