Heading Main

If you’re currently in a second marriage and have older children from your first marriage, this trust should be of interest to you: a qualified terminable interest property (QTIP) trust. It can provide future security for both your surviving spouse and your children from a prior marriage. Plus, it can provide flexibility to your estate plan. Let’s take a closer look at the ins and outs of a QTIP trust.

How does a QTIP trust work?

Generally, a QTIP trust is created by the wealthier spouse, although sometimes both spouses will establish a corresponding trust. When the grantor dies, the surviving spouse assumes a “life estate” in the trust’s assets. A life estate provides the surviving spouse with the right to receive income from the trust, but he or she doesn’t have ownership rights. This means that the surviving spouse can’t sell or transfer the assets. Upon the death of the surviving spouse, the assets are passed to the final beneficiaries, who are typically the children from the grantor’s first marriage.

Accordingly, you must designate the beneficiaries of the QTIP trust, as well as the trustee to manage the assets. This could be your spouse, adult child, close friend, or, as is often the case, a third-party professional.

A side benefit of establishing a QTIP trust is that it may alleviate family tensions. Your current spouse can relax, realizing that he or she will be taken care of. At the same time, your children from a prior marriage know that they won’t be “cut out of the estate” by a stepparent who might turn against them or remarry.

Of course, a QTIP trust can’t provide ironclad protection against family conflicts that may arise after you are gone. For instance, the parties may differ over the allocation of assets from an investment viewpoint. This is one of the reasons why it’s often a good idea to appoint an independent professional trustee.

What are the estate tax consequences?

A QTIP trust is designed to combine the estate tax benefits of the unlimited marital deduction and the gift and estate tax exemption. When you create the trust and provide a life estate to your spouse, the assets are sheltered from tax after your death by the unlimited marital deduction.

After your spouse passes away, assets in the QTIP trust are subject to federal estate tax. However, the gift and estate tax exemption will likely shelter most estates from this tax liability.

What if estate tax laws change?

A QTIP trust can provide added flexibility to your estate plan. For example, at the time of your death your family’s situation or the estate tax laws may have changed. The executor of your will can choose to not implement a QTIP trust if that makes the most sense. Otherwise, the executor makes a QTIP trust election on a federal estate tax return. (It’s also possible to make a partial QTIP election — that is, a QTIP election on just a portion of the estate.)

To be effective, the election must be made on a timely filed estate tax return. After the election is made, it’s irrevocable.

The right technique for your plan?

A QTIP trust may be the right estate planning vehicle if you’re remarried and have older children from your first marriage. Using this trust type can provide you peace of mind that your current spouse will be taken care of after your death, and that the trust’s assets will eventually be passed on to your children after your spouse passes away.

© 2023