A qualified terminable interest property trust, often shortened to a QTIP trust, is a specific type of trust that allows spouses to preserve assets after one of them dies. QTIP trusts are a type of irrevocable trust that is commonly used by spouses who have children from another marriage. A QTIP trust receives certain assets from the grantor that are then locked in and managed by a trustee, usually the other spouse or a child.
When the grantor passes away, the QTIP trust will provide a “life estate” to the spouse. This grants the spouse any revenues or interest front the trust that the grantor deems as well as the use of any properties that are in the QTIP trust. When the spouse receiving the life estate passes away, the assets in the QTIP trust will pass on to the beneficiaries listed, usually the children from the grantor’s previous marriage.
In general QTIP trusts have two main features: control and flexibility. Like all trusts, QTIP trusts are an invaluable tool for minimizing the estate tax of the grantor. Unlike most trusts, however, the executor of the will will be able to choose whether to accept the QTIP trust under its terms or not implement the trust at all. Additionally, the conditions of a QTIP trust can allow the grantor to provide for their spouse while simultaneously ensuring an inheritance for their children.
QTIP trusts are a specialized tool that can be used to great effect to preserve the wishes of the grantor. Before creating a QTIP trust, however, it is important to ensure that this specialized trust fits the needs facing the grantor.
One important thing to note is that a QTIP trust does not fully sidestep state or federal estate taxes. Instead, assets placed into the QTIP trust account are delayed from estate taxation by the lifetime of the surviving spouse.
When a QTIP trust is initially formed, the spouse assumes the life estate and the assets within the QTIP trust are folded into their estate. After the surviving spouse passes away, all of the assets in the QTIP trust are taken out of the surviving spouse’s estate for calculation of the estate tax exemption. This can be a beneficial play if the grantor dies at a time when the estate tax exemption is expected to increase or when estate taxes are expected to decrease.
While the surviving spouse is using the life estate, they do not hold ownership of the assets. They cannot sell the assets contained within and they are not allowed to give away or bequeath the QTIP assets. Instead, after the surviving spouse passes away, the assets in a QTIP trust transfer to the final beneficiary written in by the grantor.
Access to QTIP trusts is restricted to legally married couples. As such, unmarried couples, divorced couples, and other such individuals will find using a QTIP trust difficult to impossible. This impediment was a long-standing issue for wealthy LGBTQ couples who until 2013 were denied the right to use QTIP trusts. Following the U.S. Supreme Court decision in U.S. v. Windsor, married same-sex couples were allowed to claim all tax law benefits enjoyed by heterosexual couples including the marital deduction.
QTIP trusts can be an effective vessel for securing the inheritance of children from a previous marriage while still providing for your spouse. If you are considering establishing a QTIP trust, you will need the help of a trusts & estates attorney.
Since QTIP trusts are irrevocable, it is vital to ensure that the contract perfectly encapsulates your wishes. An experienced trusts & estates attorney can ensure that your assets are legally secured in a QTIP trust that allows your spouse the life estate she needs while guaranteeing your children the inheritance they deserve.
