Estate Planning In The Context Of A Second Marriage

A. Stepchildren.

Care should be taken to identify and address issues of step-children with an estate planning client. Although a client may consider and refer to a step-child as his “child,” for purposes of estate administration, New Jersey’s statutory definition of a “child” includes “any individual, including a natural or adopted child, entitled to take by intestate succession from the parent whose relationship is involved and excludes any individual who is only a stepchild….” N.J.S.A. 3B:1-1. (Emphasis supplied).

For purposes of intestate succession, step-children  have been added as a class of takers, but they are a final class of takers. N.J.S.A. 3B:5-4(f); see Senate Judiciary Committee Statement, No. 708-L.2004, c.132.

For purposes of the transfer inheritance tax rates and exemptions, a decedent’s stepchildren are treated the same as natural children. N.J.S.A. 54:34-2.1.

B. The “QTIP” Trust.

Providing for children of a former marriage is often the focus of estate planning in the context of a second (or subsequent) marriage. When one spouse wishes to provide life income to the other, but wishes his or her property ultimately to pass to the children of his/her previous marriage, a Qualified Terminable Interest in Property (“QTIP”) trust may be utilized to effectuate this intent.

Through a QTIP trust, the testator is able to control the disposition of his or her property after the death of the surviving spouse, without running afoul of the “terminal interest” rule (which subjects interest received by a surviving spouse to taxation unless the property is consumed or transferred during his or her life). Deener, Jerome A., New Jersey Practice Series, Wills and Trusts–Tax Considerations: Qualified Terminable Interest in Property Trust (3d ed. 2007).  Thus, the testator’s estate is able to claim a marital deduction.

Pursuant to IRC §2056(b) and §2044, a transfer must meet the following requirements to qualify for the marital deduction as a QTIP:

  1. the property must be included in the decedent spouse’s estate;
  2. the property must pass from the decedent to the surviving spouse;
  3. the surviving spouse must receive a qualifying income interest for life with the income being paid at least annually;
  4. no person may have a power to appoint any part of the property to any person other than the surviving spouse (but the surviving spouse may be granted a power to appoint the property after death. Of course, to ensure that the children of the decedent’s prior marriage ultimately receive the property, a power of appointment would not be given to the surviving spouse in the context of a  second marriage.); and
  5. QTIP treatment is elected on the estate tax return. The QTIP property is included in the gross estate of the surviving spouse only if QTIP treatment is elected by the executor of the estate of the first spouse to die. This determination of whether deferral of tax is desirable is not made until the first death, providing considerable flexibility. If the QTIP election is not made, the QTIP property is subject to tax in the estate of the first spouse to die, and, thus, is not included in the gross estate of the surviving spouse.

By employing a QTIP trust, the testator can minimize estate tax, thereby maximizing the property available to provide income to the surviving spouse, and ensure that the balance be available for the children of a previous marriage.

Other requirements are that the QTIP property must be income-producing property, or the trust must give the surviving spouse the right to convert it to income-producing property; and the income must be paid exclusively to the surviving spouse, and not to any other beneficiaries.