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What is a QTIP Trust?

Posted on 08 Jun 2011 by admin | Filled under: uncategorized

A Qualified Terminable Interest Property (QTIP) Trust is an advanced estate planning tool that allows your spouse the use and enjoyment of your property, estate-tax free, while ensuring that your children ultimately inherit the property.

How Does a QTIP Trust Work?

You establish the trust so that, upon your death, your property passes to the trustee, who manages it for the benefit of your spouse. In order for your spouse to qualify for the marital deduction, that is, receive the property tax-free:

He or she has to be entitled to all the annual trust income for life; and

Your spouse has to be the only one entitled to use the trust principal as long as her or she is living.

Your trustee distributes the income from the trust to your spouse each year, and is only allowed to let your spouse encroach on the trust principal under certain limited circumstances.

When your spouse dies, the trust property passes on to the beneficiaries you designated when you created the trust. It's at this point that the property is taxed.

Advantages and Drawbacks

The main drawback to a QTIP Trust is that it's taxed at the point that your children inherit the property, so they may not see this as a very good deal.

There are several potential advantages, given your family situation. The overall advantage is that your spouse avoids estate taxes on the trust property.

If you're in a blended family, where you've remarried and your children and your new spouse are at odds with each other. With a QTIP Trust, and independent trustee controls the assets, so your spouse is able to enjoy the property during his or her lifetime, and your wealth is preserved and passed on to your children. The same is true even if you're not in a blended family, but there's conflict between your spouse and your children.

This type of trust is also useful if you're concerned about your spouse getting into financial difficulty after you've passed away. Once the property is funded into the trust, it is not titled in your spouse's name. Because of this, it is beyond the reach of creditors.

A QTIP trust might also be useful in situations where your spouse becomes ill and needs to engage in Medicaid planning. Again, because the property in the trust does not belong to your spouse, it may not be "countable" for Medicaid purposes. Because the laws concerning Medicaid qualification change frequently, it's important to consult with an estate planning attorney experienced in this area of the law before using a QTIP Trust for this purpose.
Your estate planning attorney can offer you guidance as to whether a QTIP Tust is an appropriate planning tool for your family.