When going through the estate planning process, there is no shortage of options when it comes to ways to preserve your wealth for future generations. But, while the list of options may seem endless, certain options are better than others in certain circumstances, and you need to choose the estate planning tools that best reflect your unique finances and family dynamics.

In this article, we will discuss the benefits and limitations of the qualified terminable interest property (QTIP) trust. Despite its complex name, the principle behind a QTIP trust is fairly simple, and it can provide a number of important benefits under the right set of circumstances. Is a QTIP trust for you? How do you decide? Here is what you need to know to begin making informed decisions.

The QTIP Trust Explained

A QTIP trust allows you to provide for your spouse’s financial needs during his or her lifetime while also ensuring that your estate will ultimately be distributed to an individual (or individuals) of your choosing. The QTIP trust is exclusively available to spouses, and it is most commonly used by parents who are in second marriages. In a typical scenario, a person will use a QTIP trust to provide financial security for their second spouse while ensuring that their children from a prior marriage still stand to inherit the bulk of their estate.

Forming a QTIP trust involves the same basic procedures as forming any other type of estate planning trust. You (as the “grantor”) prepare the documentation to establish the trust, and then you fund the trust with assets that will be managed by your designated trustee (these assets are referred to as the trust “principal”). You also name the beneficiaries of the trust, which, in the example above, would be your current spouse and your children from a prior marriage.

But, rather than giving your beneficiaries substantially equal rights in the trust principal, you grant different rights to your spouse and children. Your spouse receives an interest known as a “life estate,” which means that he or she is entitled to proceeds generated by the trust during their lifetime. Upon your spouse’s death, this life estate automatically terminates, and your children are entitled to the trust principal (subject to any conditions you may choose to impose).

As you can see, this is a valuable solution for those who do not wish for their spouses’ estate plans to control the ultimate distribution of their accumulated wealth. With a will or basic revocable trust, your spouse would inherit your estate outright (or whichever portion you left to your spouse). Upon his or her death, any remaining assets would be distributed according to his or her estate plan. If your spouse’s estate plan does not include provisions for transferring your wealth to your children (either currently or as revised after your death), your children could end up receiving nothing from your estate.

Benefits of Using a QTIP Trust

As you can see, using a QTIP trust can give you certainty that your spouse will be able to live comfortably in your absence and that your wealth or prized possessions will be preserved for your children. Other benefits of using a QTIP trust include:

  • Estate Tax Deferral – With a QTIP trust, no estate tax is owed at the time of your death. Your spouse qualifies for the unlimited marital deduction (assuming he or she is a U.S. citizen), and estate tax liability (if any) is not triggered until your spouse’s death.
  • No Power of Appointment – With a QTIP trust, your spouse does not have power of appointment over the trust principal. This means that your children’s beneficiary rights are secure.
  • Easing Family Tensions – Questions about estate planning can often create significant tension between stepparents and stepchildren. In many cases, a QTIP trust will adequately satisfy all family members’ desires, allowing you to move past any financially-motivated hostility.

Alternatives to a QTIP Trust

Despite the benefits that QTIP trusts offer, when planning your estate, you should not consider a QTIP trust to the exclusion of the other options that are available. Depending upon your family circumstances and estate planning goals, you may also be able to make use of tools such as:

One important fact to keep in mind about QTIP trusts is that they are irrevocable. While there are actually a number of potential ways to modify or terminate an irrevocable trust, you will want to be sure to consider the long-term ramifications of forming a QTIP trust before choosing this as one of your estate planning tools.

FAQs: Incorporating a QTIP Trust into Your Estate Plan

Q: If I use a QTIP trust, do I have to put my entire estate into the trust?

No, absolutely not. As with all aspects of your estate plan, the assets you put into your QTIP trust are entirely up to you. Keep in mind, however, that in order for a QTIP trust to serve its purpose, it will generally need to generate sufficient income to provide for your spouse without the distribution of trust principal. If your QTIP trust is underfunded, it could backfire in terms of leading to legal disputes between your spouse and children.

Q: Can same-sex couples use QTIP trusts?

Yes. The Internal Revenue Service (IRS) has recognized same-sex marriages since 2013. As a result, same-sex spouses can use QTIP trusts and qualify for the unlimited marital deduction and estate tax deferral.

Q: What is a “QTIP election”?

If your spouse’s financial condition at the time of your death is such that he or she does not need to rely on the income from your QTIP trust, the “QTIP election” allows your spouse to forego his or her life estate. The QTIP election must be made by the executor of your estate on the estate’s tax return; and once the election has been made, it is irreversible.

Q: Can my spouse and I both create QTIP trusts?

Yes, absolutely. In fact, this is common for wealthy parents who are each in their second (or subsequent) marriages. You and your spouse can each create QTIP trusts that ensure financial stability for one another while also preserving your respective assets for your own biological children.

Q: What if I want to leave my assets to charity?

If you want to provide income for your spouse but ultimately want your wealth to be donated to charity, you can still use a QTIP trust. This is known as a QTIP trust with a charitable remainder. However, you have a variety of other options available as well (including charitable remainder trusts, charitable lead trusts, and private foundations). Depending on your specific goals, one of these alternatives may provide a more comprehensive set of advantages.

Schedule an Initial Consultation at Jiah Kim & Associates

If you would like more information about establishing a QTIP trust or exploring the other estate planning tools that are available, we encourage you to contact us for an initial consultation. To speak with an experienced estate planning attorney about your needs, please call (646) 389-5065 or inquire online today.

This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

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