A “QTIP” (Qualified Terminable Interest Property) Trust is generally recommended when the wealth of one of the spouses exceeds or is likely to exceed the exclusion amount.
Upon the first spouse’s death, the assets in the trust divide into three separate trusts, namely: the “Survivor’s Trust”, the “Bypass Trust” and the “QTIP Trust.” The Bypass Trust will generally hold the deceased spouse’s assets which equal the available exclusion amount; the QTIP Trust will hold the balance of the deceased spouse’s assets, if any; and the Survivor’s Trust will hold the surviving spouse’s interest in the trust’s assets. Looking for our article on self-settled spendthrift trusts instead?
The assets allocated to the Survivor’s Trust are the surviving spouse’s assets and, therefore, are not included in the deceased spouse’s estate. The assets allocated to both the Bypass Trust and the QTIP Trust are included in the deceased spouse’s taxable estate; however, since (i) the amount of assets allocated to the Bypass Trust does not exceed the federal estate tax exclusion amount, and (ii) the assets allocated to the QTIP Trust qualify for the marital deduction and will not be subject to estate tax until the surviving spouse’s death, the deceased spouse’s estate does not have any federal estate tax liability.
The provisions of the Survivor’s Trust and the Bypass Trust established for the benefit of the surviving spouse in a QTIP Trust are the same as those discussed previously for an A/B Trust. The assets of the QTIP Trust are held for the benefit of the surviving spouse for so long as he or she lives. Generally the QTIP Trust provides that the surviving spouse will receive all of the net income from the QTIP Trust, plus so much of the principal thereof as the Trustee deems necessary or advisable for his or her proper health, maintenance and support.
Upon the surviving spouse’s death, the assets which remain in the QTIP Trust are included in the surviving spouse’s taxable estate, although any estate tax which is attributable to these assets will be paid from the QTIP Trust’s assets.
The net assets which remain in the QTIP Trust after the payment of estate taxes in the surviving spouse’s estate are combined with the assets then remaining in the Bypass Trust (as well as the assets remaining in the Survivor’s Trust, if the surviving spouse has not otherwise changed the dispositive provisions relating to those assets), and held for the benefit of the couple’s children (and/or other beneficiaries).
Another difference is that the QTIP Trust is irrevocable, protecting the deceased spouse’s disposition from change. Further, with a QTIP Trust, the surviving spouse could have up to 15 months after the deceased spouse’s death to decide on whether or not to make a partial QTIP election and/or claim portability, while a disclaimer must be made within nine months. Also, with a Qualifying QTIP there is a new income tax basis at the surviving spouse’s death. If needed, this QTIP Trust arrangement also allows for allocation of the GST exemption by making a reverse QTIP election. This is a variation on disclaiming to a Bypass Trust, by first making a partial QTIP election.
Without some type of trust provisions, each adult heir will receive his or her entire inheritance outright, and each younger heir will receive his or her entire inheritance upon reaching the age of majority. Many people believe that the receipt of a substantial inheritance will have a significant adverse impact on younger beneficiaries if these younger beneficiaries receive the inheritance outright; therefore, most couples desire to delay the distribution of the principal of their estates until their children reach certain “older” ages.
The provisions of a revocable living trust permit a trustor to specify when, to what extent, and under what conditions, the trust’s assets are distributed to or used for the benefit of their children and other beneficiaries. A delayed distribution scheme avoids the potential wasting of family assets by immature beneficiaries, while still providing for the beneficiaries’ health, education, maintenance and support. Further, even for an older child, it is advisable to leave the child’s share in a trust and thereby protect the assets from the child’s (i) former spouse; (ii) creditors and (iii) potential tax liabilities. In those instances, the child may be given the ability to act as the trustee of his or her trust and control the distribution of his or her share of the trust assets. This is a Wyoming spend-thrift trust.