Tax Results of Settling Disputes Involving Marital-Deduction (QTIP) Trusts
A "QTIP trust" allows a person's estate to receive a 100% estate-tax marital deduction for assets left in trust for a surviving spouse for life, with the remainder of the trust assets going to the settlor's children (or other heirs) once the surviving spouse passes away [click here]. A common source of trust litigation is the hostility often existing between children of a first marriage and the step-parent who becomes the life-time beneficiary of the QTIP trust.
One very effective long-term solution for this type of litigation is to permanently separate the warring factions by simply terminating the QTIP trust and dividing the assets between the life-time beneficiary (surviving step-mother) and the remainder beneficiaries (children of dad's first marriage). Sounds simple, but the tax and trust-law issues triggered by this split can be extremely complex. There are two recently-published resources that provide a solid starting point for trusts-and-estates lawyers looking to get their arms around QTIP splits.
First, I recently wrote about creative lawyering by Florida attorneys working through a QTIP trust split/termination and related IRS Private Letter Ruling 200844010, in which the IRS outlined the operative tax issues and blessed the tax results the parties were attempting to achieve in their settlement agreement [click here].
Second, in a follow-up to his blog entry discussing the QTIP-termination PLR [click here], Florida tax attorney/blogger Charles Rubin, of Gutter Chaves Josepher Rubin Forman Fleisher P.A., recently published an article entitled Tax Results of Settling Disputes Involving QTIP Trusts. Mr. Rubin's article does an excellent job of expanding on the tax issues reflected in IRS Private Letter Ruling 200844010 and pointing out all the other potential traps for lawyers involved in similar cases.
Presto! You're now a QTIP trust termination expert.
The RPPTL Probate Law and Procedure Committee has been struggling with the issue of homestead which is not devised in accordance with the Florida Constitution and the problems that arise between the surviving spouse and the decedent's children. The life estate which results from Section 732.401 is eligible for QTIP treatment. In looking at settlement options between a surviving spouse and the children from a prior marriage, Mr. Rubin's article applies to Section 732.401 homestead life estates when a QTIP election has been made on the decedent's Estate Tax Return, even in the absence of a specific QTIP Trust. It is a huge trap for practioners, especially those representing the surviving spouse.