What is a QTIP Trust

Trusts serve as the foundation of effective, integrated estate plans, and can help preserve and keep your assets from going through the probate process when you pass.  Without the protection of a good trust, your accumulated wealth and family’s future are on shaky ground.

There are many different kinds of trusts, including revocable, irrevocable, and other more targeted, strategic trusts. A QTIP trust, which is short for Qualified Terminable Interest Property trust, is an excellent option for married couples where one spouse has concerns about the future of their surviving spouse and assets after they pass away. A QTIP is also useful for people who are remarried and have children from a previous marriage. A QTIP essentially allows the creator of the trust to protect their surviving spouse and the future disposition of their assets after the surviving spouse passes away. A QTIP trust can offer peace of mind that your spouse will be taken care of if anything happens to you, and the financial reassurance that your assets and legacy will ultimately be passed to your children or other designated loved ones.

QTIP Trust

A QTIP trust allows one spouse to provide income and security for their surviving spouse, while passing the underlying assets to their children or to the beneficiaries of their choice without concern that those assets will be diverted after they pass away.

QTIP trusts are similar to Marital trusts, but there are some very important differences. While marital trusts also hold assets belonging to the deceased spouse, the surviving spouse has much more control over those assets and can pass them to the beneficiary of their choice. Under a QTIP trust, the deceased spouse’s assets provide income for the surviving spouse, but the surviving spouse can not change the wishes of the deceased spouse with regard to the final allocation of those assets.

How QTIPs Work

A QTIP trust is irrevocable, meaning that assets transferred into the trust usually can’t be reversed without significant complications.  Assets may be transferred to a QTIP immediately upon creation, or they can be delayed and transferred after the creator of the trust passes away. The creator will need to select a trustee to manage the trust, and the remainder beneficiaries who will receive the assets after the surviving spouse passes away. The surviving spouse is considered to be a lifetime beneficiary, as they’re able to draw on trust income during their lifetime.

QTIP and Surviving Spouses

While the surviving spouse is restricted from accessing the underlying assets in a QTIP, they still benefit from the income it generates. The assets that can be held by a QTIP trust may include properties, investments, accounts, pensions, annuities and distributions from retirement plans. The surviving spouse can collect the income the property generates, but the property goes to the remainder beneficiaries.

QTIP Tax Treatment

QTIP assets qualify for the marital deduction, meaning all assets in the QTIP are excluded from estate tax purposes. Upon the death of the surviving spouse, the QTIP assets are passed to the remainder beneficiaries. At this point, assets held in the trust would be included in the surviving spouse’s estate for tax purposes, and any estate tax obligation owed when the surviving spouse passes away will be passed on to the remainder beneficiaries.

QTIP Trust Advantages

A QTIP is generally the preferred option if you have children from a previous relationship. A QTIP allows you to protect your current spouse while ensuring that your children inherit your assets. A QTIP might also be appealing if your current spouse has poor spending habits or significant amounts of debt.

The Take Away

QTIPs might be the best option for estate planning purposes if you’re married and have children from a previous marriage, or if you’re concerned about what might happen to your spouse after you die. QTIPs provide asset protection, tax advantages, and reassurance that your loved ones will be provided for.

The Estate Planning and Asset Protection group at Johnson Fistel is here to help you make the best decisions for your family’s financial protection peace of mind. Reviewing your financial needs and plans with our team of seasoned experts can help you decide if a QTIP trust is right for you.