What is a QTIP trust?
A qualified terminable interest property trust (QTIP trust) is a marital trust in which interest generated from that trust is given to a surviving spouse, while the trust assets are given to other beneficiaries determined by the grantor, such as his or her children from a previous marriage. A QTIP trust ensures that a grantor's surviving spouse is taken care of, while also ensuring that the trust will continue to provide for any children, even after the surviving spouse has passed. A QTIP trust must meet specific federal requirements to be considered valid.
Distribution Terms of a QTIP Trust
Normally, a marital trust will provide for a surviving spouse for the duration of their life, but still leave them free to specify who the trust will go to after they die. A QTIP trust, however, works a little differently. While it takes full advantage of the marital deduction, ensuring that the surviving spouse does not have to pay any taxes, it also prevents the surviving spouse from appointing, controlling, or distributing the money once the first spouse dies. In other words, the couple must agree on the distribution terms of the QTIP trust before either of them die, and this plan will remain cemented in place after the first spouse dies.
Rules and Uses for a QTIP Trust
In order for the courts and the IRS to acknowledge a QTIP trust, two requirements must be met. First, the surviving spouse must receive payments from the trust. While the law requires these payments to be at least annual, they can also be monthly or quarterly. This means that a traceable amount of money must be removed from the trust at least once a year, listed on the surviving spouse’s taxes and acknowledged in the trust portfolio.
The second and most unique requirement of a QTIP trust is that no one may be given power of appointment over the trust during the life of the surviving spouse. As discussed above, this means that even if the surviving spouse remarries, they cannot access the trust funds to pay off creditors or for any other reason. They will only receive the designated annual payment from the money and the remaining funds in the trust will pass to whomever was designated by the grantor before he or she died.
If a couple’s estate is so large that dividing into two trusts, such as with an AB trust, still does not reduce the tax burden substantially upon the death of the second spouse, then a QTIP trust is also added into the trust documents. The QTIP trust allows for a way of spending down more of the estate and avoiding tax consequences from the transfer of wealth. Additionally, if the surviving spouse is in any way incapacitated, the QTIP trust will provide a safe means of keeping your wealth away from creditors while still providing for your spouse.
How to Calculate a QTIP Trust’s Corpus
The QTIP trust is the third trust calculated when determining your flow of wealth. For this example, let’s say that the first spouse has terminal cancer and is expected to die within the year. This spouse’s half of the estate is $7,400,000. The annual amount that can be passed from an estate without taxes is $5.45 million on deaths occurring in 2016, so this amount can be removed from the couple’s wealth at this spouse’s death without any tax consequences.
First, subtract the desired taxable estate from the total estate. In this case, you would be left with $1,950,000. This is the amount that must be placed into the Q-Tip trust to avoid tax and creditor liability. Once the second spouse dies, any amount remaining in this trust is then included in the second spouse’s estate, but the remaining amount of this trust will not be taxed at the second spouse’s death because it had been placed into a QTIP trust.
Getting Legal Help
If a QTIP trust sounds like a good option for your estate planning needs, contact an estate planning attorney for a consultation.