One lesser-known feature of estate management is called a QTIP, which stands for Qualified Terminable Interest Property trust. What is a QTIP trust? This trust not only allows the creator of the trust to arrange an income for a remaining spouse but also maintains control of how the trust assets are distributed after the remaining spouse passes away. The QTIP trust will distribute any income generated from the trust and sometimes even the principal to the spouse who remains for the rest of his or her life. When the spouse dies, the remainder is then distributed to the beneficiaries specified by the creator of the document. What is a QTIP trust? Let’s delve a little deeper into the specifics.
HOW DOES A QTIP TRUST WORK?
The QTIP trust is an irrevocable trust that is frequently used by people who have children from a previous marriage. This type of trust permits the creator (aka grantor) to look after the spouse and ensures that the trust assets are passed on after the remaining spouse passes to beneficiaries designated by the creator. These beneficiaries may be children from a trust creator’s prior marriage, other family members, or even friends.
Another benefit of a QTIP trust is that it may help reduce gift and death taxes in some cases. The assets involved in this type of trust provide income to the surviving spouse. They also qualify for marital deductions, meaning that the value of the trust isn’t taxable after the death of the first spouse. Instead, the assets only become taxable after the death of the second spouse. The liability is transferred to the named beneficiaries of the assets within the trust.
In addition, the trust renders control over the assets should the surviving spouse die. In general, the surviving spouse never has control over the principal and, in such scenarios, the QTIP can prevent the remaining assets from being transferred to the living spouse’s new partner should they decide to get married.
APPOINTING A TRUSTEE FOR THE QTIP TRUST
At a minimum, at least one trustee has to be appointed to manage the trust. Many people opt to name several trustees simultaneously. The role of the trustee is to oversee the assets and have some type of authority over the management of the assets. The trustee may be a surviving spouse, an attorney, a financial institution, or other family members or friends.
PAYMENTS AND QTIP TRUSTS
Once the QTIP trust has been created, the surviving spouse will receive payments from the trust based on the income generated by the trust – something very similar to stock dividends. The payments may be made from the principal as long as the grantor has permitted it when first creating the trust. The payments are made to the surviving spouse for the rest of his or her life. Following the death of the spouse, the payments continue as they are not transferable to other individuals. The remaining assets in the trust then belong to the listed beneficiaries.
WHY ESTABLISH A QTIP TRUST?
A common reason why some married people establish a QTIP is to take advantage of the marital deductions for asset transfers made to the spouse but, at the same time, want to limit the ownership rights or power he or she has over the trust assets. The QTIP’s restricted ownership provision is practical, especially for second marriages because you want to make sure that the assets held in the trust will eventually be distributed to your family or children and not the family or children of the second spouse.
BENEFITS OF A QTIP TRUST
While the QTIP trust is similar to a marital trust, it also has a few key benefits:
- Control: Once you set up a QTIP, you have absolute control over who will get your assets before you and your spouse pass away. What this means is that irrespective of what your spouse does after you die, any residual assets in the trust are passed on to the secondary beneficiaries that you named when creating the trust. The beneficiaries may be your children or grandchildren from a present or previous marriage.
- The QTIP offers protection on all income and assets. With advancing age, the surviving spouse may not be able to make sound decisions on money matters. Hence when making the QTIP trust, you can dictate how the principal or income can be distributed. This helps protect the assets of all the named beneficiaries. No other person can access the assets.
HOW DOES A QTIP TRUST WORK?
What is a QTIP trust and how does it work? It is important to understand that this type of trust is irrevocable. Once created, the terms of the trust cannot be altered. The income generated from the assets will be distributed to the spouse and when the surviving spouse passes away, the assets will be distributed to the named beneficiaries.
The recipient spouse must follow the established guidelines. The QTIP trust only permits the surviving spouse to benefit from the trust and use the marital deduction. This must be clearly stated in the QTIP trust document; otherwise, the QTIP trust will not be granted the marital deduction. Further, to make the QTIP trust viable, the trustee must file tax documents yearly in order to receive the tax benefits. If the guidelines are followed, the surviving spouse will receive income from the assets during his or her lifetime without incurring additional taxes.
THE DIFFERENCE BETWEEN A QTIP AND MARITAL TRUST
In general, the QTIP and marital trusts are very similar except that a QTIP cannot be altered by the remaining spouse. In addition, the QTIP requires that each year at least one distribution of the income occurs.
WHAT ARE THE REQUIREMENTS OF A QTIP TRUST?
The one major requirement of a QTIP trust is that it is required to pay all the income generated to the surviving spouse. Further, while the spouse is alive, there can be no other beneficiaries. The income is solely for the remaining spouse and only after the spouse has passed away will the income or principal be distributed to the named beneficiaries.
CONCLUSION
What is a QTIP trust? The QTIP is a trust that is designed such that you can leave your assets for your spouse and other named beneficiaries, while at the same time stating your terms of distribution while the trust is in existence.
This type of trust is not for all individuals, and it also depends on the type of family situation. For example, if you are not worried about how your assets will be distributed to your spouse after you die, then you may not need a QTIP. But if you want your spouse to get a certain portion of your estate and the remainder to go to beneficiaries that you have designated, then a QTIP is the ideal way to go.
Estate planning can be complex especially when one wants to ensure that your assets are transferred to your beneficiaries without any problems. The QTIP trust can ensure that your spouse and children receive an income for the rest of their life, but it is important to consult with an attorney to determine which type of trust is best for you. Elder Law, P.A. is very familiar with all types of trusts and how to help seniors choose the best estate plan for their needs. We will be happy to talk with you. The consultation is free. Call us today at (561) 588-7512.
