Investor Education | Key insights into QTIP trusts

One type of trust with an unusual name, the QTIP trust, can be a valuable estate-planning technique, especially for someone who is in a second marriage.  The name is actually an acronym for a qualified terminable interest property trust.  Essentially, it provides some future security for both a surviving spouse and children while retaining flexibility.

Background:  A QTIP is essentially a marital trust (or A/B trust) that is more restrictive than the usual setup.  With a typical marital trust, a portion of the trust assets go to the surviving spouse, and the other part goes to the children.  However, a QTIP limits the spouse’s access to the funds in the trust.

Although the spouse receives income annually from the trust, he or she cannot draw on principal or ultimately determine the disposition of the assets.  Upon the death of the surviving spouse, these assets are then distributed according to the grantor’s specifications.

Due to its restrictive nature, the property technically does not qualify for the unlimited marital deduction.  However, an executor can elect to claim the marital deduction for the QTIP assets on the estate-tax return of the grantor.

So why would you set up a QTIP trust in the first place?  There are two main reasons to consider.

First, this arrangement gives your executor flexibility in claiming the marital deduction.  An executor may be able to minimize the estate taxes owed by both spouses through coordination of this provision with the generous estate-tax exemption ($5.45 million for decedents dying in 2016).

The second and perhaps more compelling reason is that this technique allows your estate to benefit from the marital deduction while limiting the ownership rights of a surviving spouse.  As mentioned above, this may be useful with respect to a surviving spouse from a second marriage when you want to ensure that the assets ultimately end up in the hands of your children and other lineal descendants.

After the death of the surviving spouse, all the trust assets are subject to estate tax, but can be sheltered by the estate-tax exemption.

Other variations on this basic theme may apply.  For instance, a QTIP may be combined with the remainder interest that you are gifting to a qualified charitable organization.

In summary:  If structured properly under both federal and state law, a QTIP trust can be an important component of your overall estate plan.  But this is not a do-it-yourself proposition.  Obtain more details about QTIPs from an estate-planning professional.

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