Maximize Tax Benefits and Protect Your Spouse with a Qualified Terminable Interest
Property Trust
Valentine's Day spending totaled nearly $26 billion in 2024, including an all-time high of $6.4
billion spent on jewelry.1 Yet many Americans report feeling disappointed that their partner did
not do enough to celebrate Valentine's Day.2
More than 40 percent of US adults say they feel stressed about finding the perfect gift for loved
ones.3 About one-third plan to give a gift of experience this year instead of material
possessions, marking a consumer shift toward gifts that are seen as more experiential and
personalized than material items.4
While the gift of a qualified terminable interest property (QTIP) trust may not be the most
romantic Valentine's Day gesture, it could prove to be more thoughtful, caring, and valuable
than an off-the-shelf purchase.
What Is a QTIP Trust?
A QTIP trust is an irrevocable trust for married couples that offers a tax advantage for the
trustmaker (the spouse who creates the trust) and financial security for the surviving spouse
while preserving wealth for future generations. Here is how it works:
- The trustmaker's assets are transferred to the QTIP trust upon their death. These assets
are then held in trust for the surviving spouse according to the terms of the trust.
- QTIPs qualify for the federal estate tax marital deduction. This means the assets
(accounts and property) transferred to the trust are not subject to federal estate taxes at
the time of the trustmaker's death, effectively deferring those taxes until the surviving
spouse's death.
- The surviving spouse receives income generated by trust assets for the rest of their life,
giving them financial security and support.
- The trustmaker names beneficiaries who will receive the trust assets upon the surviving
spouse's death. They could be family members, such as children or grandchildren, a
charity, an entity, or anyone else the trustmaker chooses.
- A trustee appointed by the trustmaker manages the trust assets and ensures they are
used in accordance with the trust's terms, which can be customized to meet the
trustmaker's wishes and allows the trustmaker to retain control over the assets "from the
grave."
What Makes a QTIP Trust Different?
There are as many different types of trusts as there are flavors in a box of Valentine's Day
chocolates. In a way that sets them apart from other trusts, QTIPs offer a unique balance
between providing for a surviving spouse and maintaining trustmaker control over the trust's
assets.
- Trustmaker control. While a QTIP is required to pay all the income it generates to the
spouse beneficiary, the trustmaker can specify whether and under what circumstances
the spouse may access the trust's principal.
- Estate tax savings. QTIPs allow the trustmaker's estate to take advantage of the
unlimited marital deduction to minimize estate taxes.
- 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
protection will depend on the level of control the surviving spouse has over the trust's
assets. However, after assets have been distributed to the surviving spouse, they may
be subject to a creditor's claim.
Customizing a QTIP Trust
One of the strengths of a QTIP trust lies in its flexibility. Some ways to customize a QTIP include
the following:
Distributions of Principal
The trustmaker has almost unlimited leeway to dictate when and how the trustee can distribute
principal to their spouse. For example, they can limit access to the principal for only health,
education, maintenance, or support expenses (i.e., the HEMS standard). They can also give the
trustee sole discretionary authority to distribute principal based on the spouse's needs. They
can even prohibit spousal access to the principal altogether to preserve assets for remainder
beneficiaries.
Spousal Control
Although the trustmaker has the final say on the ultimate distribution of assets when the
surviving spouse passes, they can give the surviving spouse some degree of control 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, other family
members).
Why Use a QTIP Trust?
A QTIP trust can be an effective estate planning tool if you want to provide for your spouse after
your death but ultimately limit the spouse's control over your assets and have your assets pass
to different beneficiaries.
This arrangement may prove useful when you have children from a previous marriage, your
spouse does not manage money wisely or has creditor issues, or there is some other unique
family dynamic. A QTIP trust can also be part of a business succession strategy that ensures
your spouse has an income stream from the business without being involved in running it.
This Valentine's Day, instead of the customary candy, cards, flowers, and jewelry, consider
showing your love with the gift of a QTIP trust that lasts a lifetime - and, in many cases, even
longer. Call our office to schedule an appointment.
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 Counselors 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.
