QTIP Trusts (Qualified Terminable Interest Property Trusts)
What are QTIP trusts?
Qualified terminable interest property trusts, also known as QTIP trusts, are trusts that allow the Grantor (the creator of the trust) to provide income for his or her surviving spouse after the Grantor’s death, while enabling the use (or partial use) of the unlimited marital estate tax deduction. While most QTIP trusts are created for estate tax purposes, they can also be used for remarriage risk concerns because the Grantor can structure the trust to preserve the principal of the trust for the benefit of his or her children, grandchildren, or other beneficiaries regardless of whether the surviving spouse remarries. There is one major catch - only the surviving spouse can benefit from the trust assets of the QTIP during his or her life. In other words, the children cannot directly benefit from a QTIP trust until the death of the surviving spouse. Otherwise, the unlimited marital deduction provision wouldn’t apply.
How does the QTIP trust work?
A QTIP trust will leave assets for the benefit of the surviving spouse and will usually restrict the spouse to only the net income generated from such assets. Any assets that are not income producing may be changed to income producing assets if the surviving spouse makes such a request (for example, if the family cottage is in the QTIP trust, but the surviving spouse decides s/he would prefer it to be sold and reinvested in a dividend stock fund or bond fund, then that is completely within the control of the surviving spouse). The net income must be distributed not less frequently than annually from the trust to the surviving spouse - although quarterly net income distributions tend to be the common practice.
It should also be noted that the surviving spouse could be allowed to benefit from the trust principal (i.e., the assets held in trust that are not the income) by granting the surviving spouse (as trustee) the ability to access the principal so long as such distribution are limited to the reasonable expenses required for the surviving spouse’s health, education, maintenance, and support (also known as HEMS or the “ascertainable standard”). There is also the ability for an independent trustee to make such distributions for the benefit of the surviving spouse in said independent trustee’s absolute discretion. When the surviving spouse does eventually pass away, the balance of the QTIP trust is then generally distributed to the remainder beneficiaries of the trust unless the trust includes a limited power of appointment and the surviving spouse chooses to exercise such power of appointment in accordance with the provisions of the trust.
Advantages of QTIP Trust
Some advantage of creating a QTIP trust are:
Ability to provide for your spouse after your death
Allows you to ensure your children’s inheritance is protected (if you structure the trust appropriately)
Similar to other trusts, assets held in a QTIP are not included in probate
Flexible tax planning opportunities for both Massachusetts and Federal estate tax purposes.
Disadvantages of a QTIP Trust
Some disadvantages of creating a QTIP trust are:
Potential conflict between the surviving spouse and the remainder beneficiaries (this is particularly true when the surviving spouse requests certain assets to be sold and invested in income producing property or if the surviving spouse has access to principal of the trust assets)
Remainder beneficiaries cannot directly benefit from assets held in QTIP trust so long as the surviving spouse is living (i.e., uncertain lock up period for children beneficiaries)
Will need assistance from a tax expert to make sure the correct tax elections are filed at the correct time.
If you’d like to learn more about QTIP trusts and whether they make sense for you and your family, then give me a call at (781) 202-6368 or email me at JLento@PerennialTrust.com to schedule your free estate planning meeting.
I look forward to speaking with you.
Sincerely,
Joseph M. Lento, J.D.
Attorney & Owner of Perennial Estate Planning
Sources and other helpful reading: Used:
Carlson, Darren, R. (2014). Your 1960S Tv Guide To Estate Planning. MOTIVATIONAL Press, INC.
Laurie IsraelLaurie Israel is a founder of Israel Van Kooy Law. (n.d.). QTIPs Made Easy. IVKDLaw. https://ivkdlaw.com/the-firm/our-articles/divorce-and-estate-planning/qtips-made-easy/.
Mary Randolph, J. D. (2016, January 21). QTIP Trusts. www.nolo.com. https://www.nolo.com/legal-encyclopedia/qtip-trusts.html.
LINK: https://www.margolisbloom.com/our-blog/7-reasons-you-should-consider-a-qtip-trust
