A QTIP trust is a special kind of trust that allows you to provide for your spouse and also preserve assets for your children. The term “QTIP trust” stands for Qualified Terminable Interest Property trust.
When Should You Consider Setting Up a QTIP Trust?
People often refer to QTIPs as marital trusts. A QTIP provides for a spouse after the trust creator has passed away. Once the spouse dies, children of the trust creator receive the remaining trust money. If the spouse remarries, the new husband or wife will not be able to access the trust property.
A QTIP works well when you are in your second marriage but still want to provide for children from your first marriage. You can leave money in the trust for your spouse’s support. When your spouse dies, your children from your first marriage will receive money too.
How Much Money Will Your Spouse Receive from the Trust?
You can control how much money your spouse receives, so that there is money left over for your children. Usually the trust will say that your spouse receives income and dividends earned by the trust property. Your spouse will not be able to make decisions about what happens to the trust assets, and he or will not be able to withdraw principal from the trust. If you wish, you can add in a provision giving your spouse the greater of $5,000 or 5% of the trust assets each year.
Does a QTIP Trust Have Tax Benefits?
U.S. tax law permits spouses to transfer property to each other without paying taxes. This is called the marital deduction. The marital deduction ordinarily does not apply to assets placed in trusts that place so many restrictions on the surviving spouse’s ability to access the assets. However, if your executor makes a special election on the estate’s tax return, your estate can claim the marital deduction for amounts you transferred to a QTIP trust during your lifetime. This exception applies because your spouse receives a lifetime income interest in assets placed in the trust.
If your estate claims the marital deduction, then estate tax payments are deferred until later. Any assets remaining in the QTIP are considered to be part of the surviving spouse’s estate for tax purposes after the surviving spouse passes away.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.