An Advisor's Guide to Qualified Terminable Interest Property Trusts
"A diamond is forever" is a popular saying. Estate planning does not have a time horizon that
long, but it does seek to protect a family's wealth and provide them with financial stability for
years to come.
Around Valentine's Day, many couples are looking for ways to display their affection. By
understanding the nuances of qualified terminable interest property (QTIP) trusts and ways to
customize them, advisors can help clients show love to their spouse with a gift that lasts a
lifetime - and in many cases, even longer.
What Is a QTIP Trust?
A QTIP trust is an irrevocable trust that allows a surviving spouse to benefit from their deceased
spouse's assets while ensuring that those assets ultimately pass to beneficiaries designated by
the deceased spouse.
Key features of a QTIP trust include the following:
- Spousal income for life. The surviving spouse must receive the income generated by
the trust assets at least annually for the rest of their life, potentially giving them financial
security and support.
- Designated remainder beneficiaries. The trustmaker designates the beneficiaries who
will receive the trust assets upon the surviving spouse's death. Such beneficiaries could
be children, a charity, or other entities or loved ones.
- Control over assets. The trustee manages the trust assets and ensures that they are
used in accordance with the (customizable) trust terms created by the deceased spouse.
Depending on the desired level of asset protection, the spouse may serve as trustee of
their trust.
QTIPs may be particularly useful for clients who want to provide for a surviving spouse but who
also wish to direct the eventual distribution of the trust to different beneficiaries. Clients can
simultaneously take advantage of the unlimited marital deduction and retain control over their
assets "from the grave", an option that did not exist until legislative reforms in the Economic
Recovery Tax Act of 1981.
Important QTIP Trust Features
Although a QTIP trust is just a trust, it is special. Certain important and unique characteristics
may make it the right solution for your married clients.
- Restricted principal access. The trustmaker can specify whether and under what
circumstances the surviving spouse may access the trust's principal. This restriction
helps protect the trust's assets from being mismanaged or prematurely spent. Such
provisions may be useful if the trustmaker has concerns about their spouse's ability to
manage assets.
- Marital deduction. A QTIP trust allows the trustmaker to take advantage of the
unlimited marital deduction to minimize estate taxes. Qualified transfers to the trust for
the benefit of a US citizen spouse will not be subject to federal estate tax at the
trustmaker's death (although the assets held in the trust may be subject to estate tax at
the surviving spouse's death).
- Protection from creditors. Assets held in a QTIP trust are generally protected from the
surviving spouse's creditors and from claims in any future remarriage. The level of asset
protection will depend on the level of control the surviving spouse has over the trust's
assets. After assets have been distributed to the surviving spouse, they are more
vulnerable to a creditor's claim.
- Balancing interests. A QTIP trust can provide income for the surviving spouse while
preserving the trust's principal for the children, allowing both to benefit from the trust as
the grantor sees fit. This arrangement may prove useful when there are children from a
previous marriage or another unique family dynamic.
Customizing a QTIP Trust
One of the strengths of a QTIP trust is its ability to be customized to a client's needs and
circumstances. Here are some top-level customization options you may want to discuss with
clients:
- Distributions of principal. The surviving spouse is entitled to income generated by the
trust at least annually, but the trustmaker can dictate whether and under what
circumstances the trustee can distribute the principal to the spouse. Distributions can be
structured in several ways, including only for ascertainable standards (health, education,
maintenance, and support) or for hardship. They can also give the trustee sole
discretionary authority to distribute principal based on the spouse's needs. The
trustmaker can even restrict principal distributions entirely to preserve the remaining
beneficiaries' trust assets.
- Granting the spouse control. Although the trustmaker has the ultimate say on the final
distribution of assets, they can grant the surviving spouse some degree of control over
the trust using strategies such as a testamentary limited power of appointment, which
lets the surviving spouse choose how the remaining trust assets are distributed upon
their death among a defined group of beneficiaries predetermined by the trustmaker
(e.g., children, grandchildren, or other family members).
Additional Options and Considerations
Although a QTIP trust may not be the most romantic gift, it could prove more thoughtful,
caring - and, years from now, more valuable - than a standard Valentine's Day purchase.
Clients can be sold on them as a way to express their love in a controlled, future-minded
manner that supports their legacy goals.
With tax season officially underway, let's discuss using estate planning tools like QTIPs to meet
clients' wealth preservation goals this February.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
You have received this newsletter because I believe you will find its content valuable. Please feel free to Contact Me if you have any questions about this or any matters relating to estate planning.
