A widower I know in his 80s just married an acquaintance of mine in her late 40s. How will he arrange to provide some support for her from his estate? If he has an IRA and a QTIP trust the Internal Revenue Service just provided some guidance.
A QTIP is a Qualified Terminable Interest Property trust. The trust would provide income from the assets to the wife during her lifetime and defer taxes until her death. The assets in the trust would then go to the children from the first marriage or other beneficiaries designated by the husband. This is very straight forward.
The complication comes if you want to have an IRA inside of the trust. This is what the IRS clarified. You should definitely consult a tax attorney or tax professional because even with the clarification it is very technical. The clarification is called IRS Revenue Ruling 2006-26.
Withdrawing the money from the IRA is a two step process according to Kelly Greene of The Wall Street Journal. In an article from Aug. 12, 2006 on page B4 titled "How to Accommodate IRAs when creating Trust for Heirs" Greene writes that the trust would first take the minimum distribution required from the IRA based on the wife's life expectancy. Then the widow would receive the income stipulated in the trust with some or all of it coming from the IRA.
IRA regulations introduce a risk to this strategy of providing for your family. If the widow outlives her life expectancy she has the right to take the entire IRA leaving nothing for the children. Greene suggests setting up two IRAs, one for the children and one for the wife to avoid this problem. Doing this might also allow you to avoid setting up a trust in the first place.
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