As I noted in my post, Second Marriages and Blend Families, individuals who are remarried and have children from a previous relationship may want to establish a plan to ensure the children from the prior relationship still inherit from his or her estate. Typically when a spouse passes away everything is left to the surviving spouse. But if the surviving spouse is not the parent of some, or all, of the decedent spouse’s children, the surviving spouse could take the entire estate and leave it to someone else when the surviving spouse dies.
A Qualified Terminable Interest Property Trust (“QTIP”) is a planning method that ensures the surviving spouse is provided for while he or she is living but upon their death the remainder of the estate will pass according to the first decedent spouse’s wishes.
What is a QTIP Trust?
A QTIP trust is a trust that is established through a Will or Revocable Living Trust, which says that the QTIP trust is to provide for the surviving spouse while he or she is still living but when that surviving spouse passes away, the remaining assets in the QTIP trust will pass to individuals named by the decedent spouse. A QTIP trust essentially allows the decedent spouse to control the assets from the grave. Unlike a disclaimer plan, which gives the surviving spouse the option of whether or not to disclaim any assets into a trust, assets are automatically placed into the QTIP trust per the instructions in the decedent spouse’s Will or Revocable Living Trust. The surviving spouse cannot leave the assets within the trust to anyone other than the beneficiaries already named by the decedent spouse.
Typically, the surviving spouse will receive the income from assets within the QTIP trust but often the surviving spouse is not allowed to access the principal assets or property within the trust. Occasionally, the trust can be structured to allow the surviving spouse to receive some of the principal of the trust to provide for his or her health, education, maintenance and support.
As is the case with most trusts, there can be one or more trustees named for the QTIP trust. The trustee(s) can be an independent person (meaning not a beneficiary of the trust) or can be a corporate trustee (meaning a bank, financial institution or trust company). The surviving spouse can also serve as the trustee but in such cases an additional trustee is often appointed to ensure the trust is managed properly.
The assets that pass to a QTIP trust qualify for the marital deduction, meaning that they will not incur any state or federal estate taxes until the surviving spouse’s death.
Who does a QTIP trust benefit?
A QTIP trust is beneficial when an individual does not want to rely on the surviving spouse to ensure assets get to beneficiaries he or she wants. Again, the decedent spouse is not giving the surviving spouse an option of how to handle the estate but rather continues to dictate the distribution even after death. The successor beneficiaries do not have to be children or descendents of the decedent spouse but can be any other individuals or charities.
A QTIP trust is also beneficial to protect assets from a surviving spouse’s creditors. Since the surviving spouse would not actually own the assets within the trust, the assets are protected from his or her creditors. Therefore, a QTIP trust is beneficial is the surviving spouse has creditors or propensity for mishandling money.
What assets can go into a QTIP trust?
Any assets that can be held in a trust can go into a QTIP trust. Common assets are investment accounts, cash, real estate and proceeds from life insurance policies. The QTIP trust can be named as the beneficiary of life insurance policies or other investments to ensure those assets pass directly to the QTIP trust upon the owner’s death.
There are strict regulations that govern QTIP trusts so it is important the QTIP trust documents are drafted and reviewed by an attorney.