Though oddly named, a QTIP trust is used by many wealthy couples to protect their assets and provide for the surviving spouse. The catchy QTIP acronym stands for Qualified Terminable Interest Property, which is property in a decedent’s estate that can still qualify for the estate tax marital deduction (with certain restrictions). QTIP can also be property that is given to a spouse that will qualify for a gift tax marital deduction, also subject to some restrictions.
Controlling Property with a QTIP Trust
Both spouses can set up a QTIP trust, leaving the assets to the other in trust. After the first spouse dies the surviving spouse receives any income that the assets produce and the use of any real estate in the trust. Only the surviving spouse can be named the life beneficiary, however, the surviving spouse does not have full ownership of the assets in the trust, nor can they give away or sell any of the assets. When the second spouse passes, the remaining assets go to the final beneficiary or beneficiaries named in the trust.
Why would this be desirable? Commonly, QTIP trusts are used in second marriages where one spouse wants to support their current spouse, but ultimately wants to ensure their children from a previous marriage receive the amounts held in trust. When a spouse makes it clear that their children from a previous marriage will inherit assets, it can help reduce family tension between children and stepparents.
Deferring Estate Tax with a QTIP Trust
With inevitable tax reform, it may be unclear what the estate tax landscape will look like by the time a trust is put into effect. A QTIP trust does not eliminate estate tax, but it will at least postpone it until the death of the surviving spouse. The QTIP allows for use of the marital deduction at the first spouse’s death under an exception to the terminable interest rule. (The terminable interest rules states that a terminable interest in a property can expire due to a lapse of time or due to the occurrence or nonoccurrence of a future event).
At the death of the second spouse, estate tax is then due on all of that spouse’s property, as well as all of the assets held up for the final beneficiaries of the QTIP trust. For 2017, the individual estate tax exemption is $5.49 million, meaning heirs can be left up to $5.49 million and not have to pay federal estate or gift tax.
The QTIP Election
A QTIP trust also provides flexibility in an estate pan for the surviving spouse. Should family, estate tax, or other pertinent factors change since the trust was originally drawn up, the surviving spouse does not have to implement it. The executor of the deceased spouse’s will, which very well could be the surviving spouse, makes the final decision. The executor must make a QTIP election on the estate tax return that is filed on behalf of the estate of the first spouse that died. The executor can choose to put some or all of the deceased’s assets into a QTIP.
Consult with an Expert
Preparing a QTIP trust is no at home job. An expert is required to make sure that a QTIP trust is the right move for your family, and that the trust avoids run-ins with IRS rules. Consult your estate planning attorney about the best option for your situation.
Walsh & Associates and LPL Financial do not provide tax or legal advice or services. Please consult your tax or legal advisor regarding your specific situation.
2350 Fruitville Rd., Ste. 201
Sarasota, FL 34237
HOURS: M-F, 9:00-5:00 ET
444 E. Hillcrest Dr., Ste. 230
DeKalb, IL 60115
HOURS: M-F, 9:00-5:00 CT