What’s a QTIP Trust ?
A QTIP Trust (qualified terminable interest property trust) lets a grantor provide assets in a “safe spot” for a surviving spouse but still control what happens to those assets once that surviving spouse passes away, and in addition, qualify any assets in the QTIP Trust for the estate tax maritial deduction, thereby preventing any federal estate tax liability in the estate of the first spouse to die. A QTIP trust can offer financial reassurance if you’re concerned about what would happen to your spouse after you’re gone.
Yahoo Finance’s recent article entitled “How Does a QTIP Trust Work?” explains that a qualified terminable interest property trust allows one spouse to provide income for another. This type of trust can also be used to pass on assets to other beneficiaries, including children. A QTIP Trust is a type of irrevocable trust, so once you transfer assets to the trust, that transfer typically can’t be reversed.
With a QTIP Trust, your spouse is considered to be a lifetime beneficiary: he or she can draw on trust income for life. Those who receive the assets held in the trust once the surviving spouse passes away are called principal or remainder beneficiaries. These may be children from a previous relationship. A surviving spouse primarily benefits from a QTIP Trust because of the income he or she can get from it. The surviving spouse would have limited or no access to the underlying assets in the trust but would still benefit from any income it generates.
As far as tax benefits, a QTIP Trust lets the assets qualify for the marital deduction, so any assets in the trust are excluded from your estate for tax purposes once you pass away. When the surviving spouse dies, the QTIP Trust is dissolved, and the assets are transferred to the remainder beneficiaries. Then the assets held in the trust would be included in the surviving spouse’s estate for tax purposes. It’s a very attractive feature because you can use the trust to manage estate taxes for a surviving spouse. Any tax obligation owing when the surviving spouse passes away would be passed on to the remainder beneficiaries.
A QTIP Trust is usually a good option if you are concerned about federal estate taxes. It might also be a good option if your current marriage isn’t your first, and you have children from a previous relationship. With this trust, your current spouse won’t be financially stranded if something happens to you. Plus, you can ensure that your kids from the previous relationship inherit your assets held in the QTIP. Also, a QTIP Trust might be the answer if you’re concerned about what your current spouse might do with your assets if inherited outright. This trust can ensure that your spouse is not able to use your assets in a way that goes against your wishes after you’re gone.
QTIP Trusts can be wise when you’re married and have children from a previous marriage. Ask an experienced estate planning attorney or your tax attorney about the benefits of creating a QTIP Trust and how it might work in your specific situation.
Reference: Yahoo Finance (July 30, 2021) “How Does a QTIP Trust Work?”