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When To Use a QTIP Trust

 

A qualified terminable interest property, or QTIP, trust provides for a surviving spouse while allowing you to maintain control over how your trust's assets are distributed once that spouse dies. Income and sometimes principal that are generated from the trust are given to the surviving spouse for life.

A QTIP trust, which is irrevocable, is especially useful if you have children from another marriage. This trust lets you look after your current spouse while making sure that the trust's assets are passed on to other beneficiaries of your choice — the children of your first marriage, in this case.

With this trust, your spouse never assumes the power of appointment over the principal. You continue to assert control over how the funds are handled. This can prevent these assets from transferring to the ex-spouse's next spouse if they remarry. And the value of the trust isn't taxable after you die: The property becomes taxable after your spouse's death and liability transfers to the named beneficiaries.

A minimum of one trustee must be appointed to manage the trust, though multiple individuals or organizations may be named simultaneously. Trustees are responsible for controlling the trust and have authority over how the assets are managed.

Surviving spouses named in a QTIP trust receive payments from the trust based on the income the trust generates, like stock dividends. The surviving spouse is never the true owner of the property; therefore, they cannot put a lien against the property named in the trust or against the trust itself.

A QTIP trust is similar to a marital trust, which also holds the assets of the spouse who dies first. You might even say a QTIP trust is a specific type of marital trust. A marital trust is created on your death for your surviving spouse, but with a QTIP trust, you have control over the trust assets and final say on designating the final beneficiaries.

With a QTIP trust, your surviving spouse may continue to live in your house, for example, but they cannot sell the house because ownership rests with the trust.

Assets and Structure

While trusts in general hold many different types of assets, it's important that a QTIP trust contain some income-producing property to provide a steady stream of income. When a QTIP trust is properly structured according to the IRS, assets can qualify for the marital deduction. The marital deduction ultimately ensures that the QTIP trust's assets won't count toward your taxable estate if you die first.

However, when your spouse dies and the assets are distributed to the beneficiaries, those assets are counted as part of the gross estate and taxes must be paid if their value is over the limit. A QTIP trust's assets are not countable toward Medicaid resource limits, so it can help your surviving spouse qualify for long-term care if income falls under eligibility requirements.

Do you think a QTIP trust is right for you? Consult with a qualified professional to see how a QTIP trust, or other kind of trust, might be right for your family.

 
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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