If you are part of a family in which there have been divorces, remarriages, and stepchildren, you may want to direct your assets to particular relatives through a qualified terminable interest property (QTIP) trust. Your surviving spouse will receive income from the trust, and the beneficiaries you specify (i.e., your children from a first marriage) will get the principal or remainder after your spouse dies. Below are some guidelines to help you better understand the qualified terminable interest property trust. Be sure to consult with your financial advisor to determine if such a trust makes sense for you.
What a QTIP trust is – It’s a type of trust that enables the grantor to provide for a surviving spouse and also to maintain control of how the trust’s assets are distributed once the surviving spouse has also died. Income, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that he or she is taken care of for the rest of his or her life.
Who should consider this type of trust – This type of trust is commonly used by individuals who have children from another marriage. QTIPs enable the grantor to look after his or her current spouse and ensure that the assets from the trust are then passed on to beneficiaries of his or her choice, such as the children from the grantor’s first marriage.
How a QTIP trust works to control property – Each spouse can set up a QTIP trust, leaving assets to the other in trust. When the first spouse dies, the survivor gets what is called a “life estate” in the assets that are left to the QTIP trust—that is, the survivor is entitled to any income the assets produce, and in the case of real estate, to its use. Only the surviving spouse can be named as the life beneficiary. The survivor does not, however, have full ownership of the trust assets and cannot sell them or give them away. When the second
spouse dies, trust assets go to the “final beneficiary” named in the trust. Commonly, the final beneficiaries are children from the other spouse’s previous marriage.
Tax advantages of a QTIP trust – An advantage of a QTIP trust is that it provides some flexibility for the surviving spouse. If by the time of the first spouse’s death, your family’s financial situation—or estate tax laws—have changed since the trust was drawn up, the survivor does not have to implement it. Your Executor can choose the estate tax treatment of the QTIP trust to reflect changes in the applicable tax laws or changes in the value of your assets since you last made your will.
The QTIP election – The decision is officially in the hands of the person you name as the executor of your will, who may or may not be your spouse. To create the QTIP trust, the executor must make a “QTIP election” on the estate tax return that is filed for the estate of the first spouse to die. To make the election, the executor lists, on a schedule attached to the estate tax return, the assets that are to go into the QTIP trust. The executor can choose to put some or all of the deceased spouse’s assets earmarked for the QTIP into the trust. Once the election is made and the estate tax return is filed (nine months after the death, plus another six months from an extension), it is irreversible.