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QTIP & Credit Shelter Trusts in Blended Families

Monday, December 19 2011

By J. Davis Connor, an estate planning attorney, in our Lake Wales office

“QTIP” (Qualified Terminable Interest Property) and “Credit Shelter” trusts, two common ways of reducing estate tax and avoiding probate, allow an estate to be placed in trust for the use of the surviving spouse for life with the balance passing to beneficiaries, usually children, upon the spouse’s later death. Additionally, under Florida law, the surviving spouse may also be the sole trustee, avoiding the payment of trustee’s fees. While QTIP and Credit Shelter trusts are justifiably popular for these reasons, serious thought should go into family dynamics where the beneficiaries are, in whole or in part, the stepchildren of the spouse establishing the trust. Three questions should be weighed objectively by anyone considering a QTIP or Credit Shelter trust in a blended family context, focusing particularly on the final question:

(1) How stable are current relations within the blended family? Are there fracture lines, either between the spouse and stepchildren, or among the stepchildren themselves? If peaceful relations are sporadic, or if there are persistent areas of disagreement anywhere in the family landscape, these should not be disregarded. The death of a parent frequently brings conflictive forces to the fore in a blended family. Such forces can, and frequently do, vent themselves in the form of lawsuits asserting liability for trust mismanagement against the trust or, worse, against the surviving spouse personally.

(2) Are there any dependency relationships involving adult stepchildren with chronic financial needs? If so, has the child become accustomed to receiving support in the past? Such a beneficiary may be more susceptible to the wrongheaded notion that the surviving spouse has caused the end of continuing financial support and, so, more motivated to legally question the validity of the trust or the trustee’s actions and/or “lobby” siblings to do so.

(3) If the answer to either of these questions is “yes,” is it really wise to make the surviving spouse the trustee of the QTIP or Credit Shelter trust? Few people want conflict in later life, especially in the courts. Litigation in such circumstances can lead to a frantic spouse’s willing unraveling of an entire estate plan in order to “get peace,” not to mention disastrous litigation costs. Naming instead a corporate trustee such as a trust company or bank trust department should be seriously considered. A corporate trustee is far less vulnerable as a rule to any claim of trust mismanagement and is far better equipped to deal with such a claim if it comes. Removal of the surviving spouse as the target of the beneficiaries’ frustrations also tends to lessen the likelihood of litigation. It is unfortunate, but true, that many who appointed their spouse as QTIP or Credit Shelter trustee to avoid the minimal fees of a corporate trustee didn’t live to see a much larger sum drained from their estate by court proceedings that might have been avoided.

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