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QTIP trust stands for qualified terminal interest property
trust. It is "qualified" because the IRS specifically allows this form of
trust, and it qualifies for the marital exemption.
Here is how it works:
Spouses are allowed to make unlimited marital gifts to each other. If they do
so at their death, in the form of a QTIP trust, the assets are qualified for the
marital deduction for gift and estate tax purposes. The receiving spouse is provided for from
the income generated by the trust. The trust may also distribute principal by an
ascertainable standard at the trustee's discretion. The grantor may either specially
name his children as the remainder beneficiary or give his spouse a limited
power to allocate the remainder among a class of beneficiaries, (such as his
children.)
This technique works particularly well in situations where one spouse has a
lot of individual property.
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So
how can someone leave money for the care of their spouse, utilize both spouse's
lifetime estate tax exemptions, and still be sure that the remainder will go to
their intended beneficiaries?
The answer is to create a QTIP trust. This
technique shelters the money by utilizing the unlimited marital deduction,
provides for the surviving spouse, and still leaves the remainder to the first
spouse's intended beneficiaries.
At the first spouses death: the estate utilizes
the first spouse's lifetime exemption while taking a marital deduction for the QTIP
trust.
At the second spouse's death: The QTIP trust is included in his/her estate.
Therefore allowing a greater estate tax exemption, yet the assets still pass in accordance with
the first spouse's instructions. Of course, the estate of the second spouse has the
right to recover funds to pay the estate taxes due to the inclusion of the money from the QTIP
trust.
Normally, an individual either has to pay estate taxes on the
property at their death, or leave it to their spouse. Leaving it to the spouse
has certain tax benefits which includes utilizing their lifetime exemption, as
well as deferring the payment of estate taxes for the greatest amount of time
possible.
However, there is no guarantee that the money will ever go to the first
spouse's children or other beneficiaries. The second spouse traditionally has
complete control over the funds left to them in the first spouse's estate. |
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Terminal means the surviving spouse gets the income interest during his/her
lifetime but that interest terminates at his/her death.
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The essential elements of a QTIP:
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The grantor must "pass" the property to the spouse. (i.e. An income
interest in any old trust won't do.)
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The surviving spouse must be entitled to all the income,
(no other beneficiary may receive any income during his/her lifetime,) and
the income must be paid at least once a year. The surviving spouse must have
the right to demand non-income producing property be made productive.
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No one can hold a power to appoint the
trust property to
anyone other than the surviving spouse during his/her lifetime.
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