A QTIP may sound familiar, but this isn’t for your ears. However, it may be good for your blended family.
A Qualified Terminable Interest Property Trust (QTIP) is a type of marital trust unique in that it can provide for a surviving spouse while also ensuring that assets are eventually distributed according to the grantor’s wishes.
It’s flexible, has lucrative tax advantages, and allows the grantor control of the assets even after death. A QTIP trust’s primary advantage is wealth transfer management within blended families or families with specific benefactors in mind.
The Basics of a QTIP Trust
Essentially, this type of trust allows the grantor to provide an income stream to their surviving spouse for life, while still retaining control over the distribution of the assets after the spouse's death.
The assets in the trust qualify for the marital deduction, deferring estate taxes until the second spouse passes.
A QTIP is also an irrevocable trust, meaning once in place, the grantor (or anyone else) cannot make changes to the trust provisions without the beneficiaries’ consent.
The assets in the trust are not considered personal property, and therefore shielded from most creditor claims and lawsuits.
QTIP Trust Example
Let’s take a look at an example to further understand how a QTIP works:
Tim and JoAnne are married. JoAnne is Tim’s second wife, and he has two children from a previous marriage, Mike and Abby.
Tim wants to provide an income for JoAnne after his death while ensuring the children he shared with his first spouse are the final beneficiaries of his assets.
Tim creates a QTIP trust, placing $5 million into it. Upon Tim’s death, JoAnne receives all the income from the trust (e.g., $250,000 per year) for her lifetime.
The trust assets (the initial $5 million) qualify for the marital deduction, deferring estate taxes until JoAnne passes away.
When JoAnne dies, the remaining assets will go to Mike and Abby, as Tim originally intended. This trust process allows JoAnne to be financially supported while protecting Tim’s children as the ultimate beneficiaries.
If Tim had any outstanding lawsuits or debts upon his death, the QTIP trust assets would be exempt from those issues as the assets are not considered personal property passed to JoAnne.
The QTIP also defers estate taxes until after JoAnne’s death, theoretically allowing for more growth opportunity of the assets over time.
Key Features and Benefits of a QTIP Trust
Income for the Surviving Spouse: The surviving spouse is entitled to all the income generated by the trust over their lifetime.
With a QTIP, the surviving spouse is the only beneficiary, and no one else can receive income from the trust assets. The grantor can also decide whether the spouse has access to the principal or just the income.
The grantor can further control the physical distribution of the income, limiting or eliminating the access to the principal by the surviving spouse, ensuring the principal remains untouched until after the surviving spouse passes.
Due to the marital deduction, the trust assets are not included in the estate (assuming they are below the allowable threshold) of the grantor’s death for estate tax purposes, keeping the principal assets in-tact to potentially grow over time.
Control Over Remaining Assets: Upon the death of the surviving spouse, the remaining trust assets are passed on to the beneficiaries designated by the grantor (most often children from a previous marriage or other family members outside of the current marriage.)
The grantor’s ability to control the distribution of assets after their death is commonly known as, “Control from the Grave.” While it sounds intense, this prevents two common issues:
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Without a trust set up in this way, the assets could get diverted to unintended inheritors upon the death of the second spouse, leaving those you wish to inherit your assets without support.
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If you set up a trust that sets up your spouse to be beneficiary but they don’t do the work needed to set up a trust for the next beneficiary, assets could inadvertently end up in probate or subject to an unnecessary tax burden.
Tax Deferral: The assets in the QTIP trust qualify for the marital deduction, deferring estate taxes until the death of the surviving spouse (for 2024, the estate tax exemption is $13.61 million for individuals and $27.22 million for married couples. Assets above the exemption are subject to federal estate tax of 18%-40%.)
After the surviving spouse’s death, the remaining trust assets are included in the estate and may be subject to estate tax, however utilizing exemptions and other tax strategies can help minimize this impact.
Best Uses for a QTIP Trust
Blended Families and Second Marriages: With these families, a QTIP trust ensures the surviving spouse is provided for while retaining control over how the trust’s assets are distributed after the surviving spouse’s death. This is beneficial if the grantor wants their children from a prior marriage to inherit their assets.
High-Net-Worth Individuals Seeking Tax Efficiency: For individuals with substantial wealth, minimizing estate taxes is a key goal in estate planning.
By deferring estate taxes until the death of the surviving spouse, a QTIP trust provides flexibility in tax planning, enabling the estate assets to potentially take advantage of tax exemptions and other strategies when the surviving spouse dies.
Providing for a Dependent Spouse: If a surviving spouse lacks the financial acumen to manage a large estate or has significant financial or even imperative medical needs, a QTIP trust can ensure they receive income for life while safeguarding the principal for future beneficiaries.
This provides peace-of-mind that the assets will be preserved and distributed as the grantor intended.
Preserving Family Wealth Across Generations: A QTIP trust can be part of a larger multi-generational estate plan aimed at preserving wealth for children and grandchildren.
By providing income to a surviving spouse and then passing the remaining assets to heirs, the trust ensures family wealth is managed carefully and distributed according to the grantor’s long-term vision.
Final Thoughts
A QTIP trust can be a versatile estate planning tool and is well suited for couples with a blended family or those seeking to balance financial support for a surviving spouse while maintaining control over the final asset distribution.
With its tax advantages, income provisions, and flexibility in directing the transfer of wealth, the QTIP trust ensures both the needs of the surviving spouse and the grantor’s wishes are met efficiently.
When considering a QTIP trust, we suggest you consult with an experienced team including a wealth manager and estate planning attorney before moving forward. The specific needs of your family, the size of the estate, and several tax considerations should all be carefully evaluated to determine if a QTIP trust is right for your estate plan.
Our free estate planning guide details the most critical aspects to estate planning and provides a helpful checklist and communication tool so you can rest assured knowing your estate will be in good hands.
