Creating a trust as part of an estate plan can help protect assets and ensure your financial legacy is preserved. If you’re married, you may consider establishing a QTIP trust, which is short for qualified terminable interest property trust. This type of trust allows the grantor to set aside assets for a surviving spouse while still having control over what happens to those assets once they pass away. A QTIP trust can offer financial reassurance if you’re concerned about what would happen to your spouse after you’re gone. Estate planning can be complicated; make sure you’re making the best decisions by working with a financial advisor.
A qualified terminable interest property trust allows one spouse to provide income for another. This type of trust can also be used to pass on assets to other beneficiaries, including children.
A QTIP trust is similar to a marital trust, though it’s not identical. Marital trusts can also be used to hold assets belonging to a spouse who passes away but they lack some of the restrictions of QTIP trusts. When the creator or grantor of a QTIP trust dies, their assets are transferred into the trust. The trust assets would then provide income for the surviving spouse.
The assets themselves would be passed on to another beneficiary. The grantor would be free to name whoever they like as beneficiaries. This is one of the key distinctions between QTIP trusts and marital trusts since with a marital trust the surviving spouse would have more say in what happens to trust assets.
A QTIP trust is a type of irrevocable trust. That means once you transfer assets to the trust, that transfer typically can’t be reversed. This kind of trust is useful for people who are remarried and have children from a previous marriage. A QTIP trust can allow the grantor to provide financially for both their current spouse as well as children they had with a previous spouse.
When you create a QTIP trust, you can transfer assets at that time or arrange for them to be transferred to the trust once you pass away. Typically, this is done through the creation of a separate will.
You’ll need to choose a trustee to oversee the trust. This person is bound by a fiduciary duty to manage the trust according to your wishes. You may also wish to name one or more successor trustees in case the original trustee is unable to complete their duties.
The next step is choosing your beneficiaries. In a QTIP trust, your spouse is considered to be a lifetime beneficiary, as they’re able to draw on trust income during their lifetime. The people who receive the assets held in the trust once the surviving spouse passes away are called remainder beneficiaries. So again, the remainder beneficiaries may be children from a previous relationship or anyone else you’d like to inherit your assets.
The surviving spouse primarily benefits from a QTIP trust because of the income they’re allowed to receive from it. While they would have limited or no access to the underlying assets in the trust, they could still benefit from any income it generates. The kinds of income-producing assets that can be held inside a QTIP trust may include investment properties and taxable investment accounts. This income can be a supplement to Social Security benefits, pensions, annuities and distributions from tax-advantaged retirement plans.
Again, the spouse would not inherit the assets themselves. So if you transfer a rental property to the trust, for example, the spouse could collect the rental income it generates. But the property itself would go to whoever you name as a remainder beneficiary to the trust.
In terms of the tax benefits, a QTIP trust allows the assets to qualify for the marital deduction. This means that any assets in the trust are excluded from your estate for tax purposes once you pass away. When the surviving spouse dies, the QTIP trust is dissolved and the assets are passed on to the remainder beneficiaries. At this point, assets held in the trust would be included in the surviving spouse’s estate for tax purposes.
This is one of the most appealing features of a QTIP trust, in that you can use them to manage estate taxes for a surviving spouse. Any tax obligation owing when the surviving spouse passes away would be passed on to the remainder beneficiaries. For 2021, the estate tax exemption is set at $11.7 million for individuals and $23.4 million for married couples.
QTIP trusts and marital trusts can both be used in an estate plan to manage tax liability while providing financially for a surviving spouse. The main differences between the two lie in how much control a surviving spouse has over trust assets and what happens to the trust assets when they pass away.
A QTIP trust could be the preferred option if your current marriage is not your first and you have children from a previous relationship. Creating this type of trust means your current spouse won’t be left in the lurch financially if something happens to you. And it also means you can ensure that your children from the previous relationship are able to inherit your assets.
You may also consider a QTIP trust if you’re worried about what your current spouse might do with your assets if left in control of them. If they have spendthrift habits or large amounts of debt, for instance, setting up this type of trust can ensure that they aren’t able to use your assets in a way that goes against your wishes after you’re gone.
Talking to a financial advisor or estate planning attorney about the specifics of QTIP trusts and marital trusts can help you decide which one may be more appropriate. If you decide to move ahead with establishing a QTIP trust, it may also be wise to have a family discussion about it with your spouse and the people you plan to name as remainder beneficiaries. This can help ensure that everyone is one the same page about what will happen to your assets after you’re gone.
QTIP trusts can be useful for estate planning when you’re married and have children from a previous marriage. This kind of a trust can offer financial reassurance if you’re concerned about what would happen to your spouse after you’re die. A QTIP trust allows for asset preservation, while also offering some tax advantages. Reviewing your financial situation and existing estate plan can help you decide if a QTIP trust is right for you.
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Rebecca Lake, CEPF®Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.
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