QTIP Trust | Qualified Terminable Interest Property Attorney

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What is a QTIP trust?

A QTIP trust is an estate planning tool that empowers you to provide income for your surviving spouse and eventually pass on the estate to your chosen beneficiaries. In most cases, QTIP beneficiaries are children from your first marriage.

While a QTIP trust ensures that your loved ones are taken care of, it also reduces estate taxes. QTIP assets are not taxed; they enjoy the same marital deductions as any other marital trust.

The estate you leave behind gets to grow tax-free. Estate taxes are only due when the surviving spouse dies. At that point, asset transfers that exceed set limits are taxed along with your other taxable assets. The current limit is $11.5M for singles and $22.36M for married beneficiaries.

Enforcing a QTIP trust

QTIP trusts can be established when you are alive or after you die through a will. With the help of the best legal minds, you can specify a trust that efficiently protects your wealth, streamlines inheritance, and reduces taxes.

That being said, there are many incidences when a trustee might face difficulties executing your last wishes. Conflicts may arise between your surviving spouse and beneficiaries.

The spouse or the beneficiaries may be disgruntled with the terms you outlined in the Trust. They may try to push for more control, early distribution, or a repeal of the whole arrangement.

The work of a trust attorney carries on even after the creation of the trust document. The legal specialists help to legally protect your assets against lawsuits, taxes, and creditors throughout its lifespan. This can strengthen the trustee’s ability to administer the Trust per your specified terms and wishes for the interest of all your loved ones.

How QTIP trusts work

All QTIP trusts work similarly. There is a grantor and two types of beneficiaries. The lifetime beneficiary is the surviving spouse, and the remainder beneficiary is the loved one that receives the assets following the death of the surviving spouse.

The wishes and terms set at the establishment of QTIP trust cannot be modified. Assets put into it cannot be taken back. When setting up the Trust, the trust attorney ensures a balance between the grantor’s wishes/goals and the legal requirements for these trust types. The value of the assets in the Trust is not taxable when the grantor dies. The property is counted as separate from the taxable estate. Estate taxes are deferred until the death of the surviving spouse.

 QTIP example

Joshua creates a QTIP trust worth $5 million for his wife and children. Eventually, he dies, and his wife Jenny survives him. She continues to receive income from the assets in Joshua’s QTIP.

But then she remarries. Her new husband, Robert, comes with three children from another marriage. Before she dies, Jenny would like to split the assets between the children she had with Joshua and Robert’s children. However, through QTIP, Joshua, though long gone, still has control over his estate and prevents it from passing on to Robert’s children.

Though she receives a regular income from the Trust, Jenny has no control over it. Her creditors cannot touch the assets in the Trust. Similarly, the assets remain out of bounds for lawsuits filed against her. When she dies, the wealth goes to the children she had with Joshua.

By the time the children are old enough to inherit the assets, the value might be double their initial worth. If Jenny and Joshua’s children get $10 million from the Trust using current exemption limits, the transfer will fully be exempt from estate taxes.

The trustee oversees the QTIP assets.

In a QTIP trust, just like any other type of Trust, the trustee is tasked with the fiduciary responsibility of managing and distributing the assets. In the example above, even if Jenny is bad with finances or is vulnerable to Robert’s bad influence, Joshua’s Trust remains safe and out of reach. Consult an advanced estate planning attorney for more details on creating, protecting, and implementing QTIP trusts.