A trust is a legal agreement that creates a three party relationship by which fiduciary control of property, often a sum of money, is given by an individual, called the “trustor” or “settlor”, to a person or institution (the “trustee”) for the benefit of some number of beneficiaries. Property of any sort may be held in a trust. Trust benefits are usually created by a will, insurance policy, retirement plan, annuity, through the drafting of a trust instrument, or by other contract. Trusts are often favored in estate planning because they do not go through the probate system, and are governed by the terms under which the trust was created. Further, trusts are also favored, for both personal and commercial reasons, because of how trusts provide benefits with various tax laws and help in the protection of assets.
A qualified terminable interest property (QTIP) enables the grantor to provide for a surviving spouse and maintain control of how the trust’s assets are distributed once the surviving spouse dies. Income, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that the spouse is taken care of for the rest of their life.
A QTIP trust generally serves two main purposes:
• The QTIP trust allows you to attach conditions on your property, rather than simply leaving it to your spouse outright. This is especially useful if you’re on your second marriage and want to provide for both your current spouse and your children from a previous marriage after you pass away; and
• When one spouse dies, it lets the surviving spouse decide how much of the deceased spouse’s property should be held in trust to maximize estate tax savings, which is helpful for combating the ever changing field of estate taxes.
How Qualified Terminable Interest Property Trusts Work
This type of irrevocable trust is commonly used by individuals who have children from another marriage. QTIPs enable the grantor to look after his current spouse and make sure that the assets from the trust are then passed on to beneficiaries of his choice, such as the children from the grantor’s first marriage. Aside from providing the living spouse with a source of funds, a QTIP can also help limit applicable death and gift taxes. Additionally, it can assert control over how the funds are handled should the surviving spouse die, as the spouse never assumes the power of appointment over the principal. This can prevent these assets from transferring to the living spouse’s new spouse, should she remarry. The property within the QTIP providing funds to a surviving spouse qualifies for marital deductions, meaning the value of the trust is not taxable after the first spouse’s death. Instead, the property becomes taxable after the second spouse’s death, with liability transferring to the named beneficiaries of the assets within the trust.
Qualified Terminable Interest Property Trustee Appointments
A minimum of one trustee must be appointed to manage the trust, though multiple individuals or organizations may be named simultaneously. The trustee or trustees will be responsible for controlling the trust and will also have authority over how its assets are managed. Examples of possible trustees include, but are not limited to, the surviving spouse, a financial institution, an attorney and other family members or friends. In a marital gift trust, the estate is split in two, with one section put in a trust fund and the second given directly to the surviving spouse; just like with a QTIP, there is no estate tax charged against either share, but unlike with a QTIP, the surviving spouse can typically appoint beneficiaries of the trust following their death.
Spousal Payments and QTIPs
The surviving spouse named within a QTIP receives payments from the trust based on the income the trust generates, similar to the issuance of stock dividends. As the surviving spouse is never the true owner of the property, a lien cannot be put against the property within the trust or the trust itself. Payments will be made to the spouse for the rest of their life. Upon death, the payments cease, as they are not transferable to another person. The assets in the trust then become the property of the listed beneficiaries.
QTIPs Trusts and Second Marriages
QTIP trusts are popular amongst second marriages because unlike traditional marital trusts which give the spouse broad authority to use trust income and principal in any way they choose during their life, and may even permit the surviving spouse to change the beneficiaries at their death, a QTIP is essentially a means to provide in some way for the spouse, but ensures that whatever is left at their death is distributed to the first spouse’s chosen beneficiaries. At a minimum, QTIP trusts must at least give the surviving spouse an income interest for life. They may also provide for principal distributions, such as for health, education, maintenance and support, but are not required to provide same. At the death of the second spouse, all assets would be distributed to the beneficiaries listed in the original trust agreement or Will. Despite the fact that a QTIP trust may be drafted to provide very little to the surviving spouse, they can still qualify for the unlimited marital deduction for estate tax purposes if a QTIP election is made on the decedent spouse’s estate tax return. In fact, you can even choose to make the election for certain assets in the QTIP trust, but not others. This allows the fiduciary of the estate to do estate tax planning and maximize both the federal and state tax exemptions.
Effects on Medicaid Eligibility
It is important to note that because some QTIP trusts may provide for principal distributions, they are not necessarily protected for Medicaid purposes. Medicaid can be applied for to cover the cost of long term care services not otherwise covered by Medicare and Secondary or Supplemental Health Insurance. In order to be eligible for Medicaid, an applicant must have limited resources. The Medicaid regulations provide that any trust in which a beneficiary is entitled to principal, other than a validly created Supplemental Needs Trust, is considered an available resource to a Medicaid applicant. If Medicaid planning is a goal, you should have your QTIP trust reviewed by an Elder Law attorney to see what options may be available to make revisions.
• First Spouse to Die Can Control Disposition
• QTIP trusts, unlike any other form of marital deduction transfer, allow the first spouse to die to control the disposition of his or her property after the death of the surviving spouse.
• QTIP trusts are often used for this purpose, particularly when the spouses have been previously married and have children from prior marriages.
• Not Included in Probate Estate
• The assets remaining in a QTIP trust upon the death of the surviving spouse will not be either part of the probate estate of the surviving spouse or subject to probate proceedings.
• Subject to the claims of the surviving spouse’s creditors.
• Post-Mortem QTIP Election Decisions: The availability of the marital deduction and the resulting inclusion of the property in the QTIP trust in the surviving spouse’s gross estate are contingent upon the executor of the first spouse to die making a QTIP election. In certain situations, it may be more advantageous to decline to make the QTIP election. In other situations, making a partial QTIP election, which is permissible, may be more advantageous.
• A QTIP trust allows the executor of the first spouse to die to make these decisions after the death of the first spouse.
• Reverse QTIP Election: A reverse QTIP election permits the executor of the first spouse to die to elect that the QTIP trust will continue to be treated, for purposes of the GST, as property transferred by the first spouse to die, even though the trust property is otherwise treated as belonging to the surviving spouse for estate and gift tax purposes. Typically, a reverse QTIP election is made to allow the first spouse to die to utilize a portion of the GST exemption that otherwise might not be used. A reverse QTIP election is only necessary when the amount of the GST exemption exceeds the applicable exclusion amount. Presently, the amount of the GST exemption is equal to the applicable exclusion amount.
• Conflicts Between Surviving Spouse and Remainder Beneficiaries: The primary disadvantage of a QTIP trust is the potential conflict between the surviving spouse and the remainder beneficiaries that may arise in regard to investment strategy, tax strategy, adequacy of accountings, and trust administration. The potential for conflict is attributable to the surviving spouse’s lack of control over the remainder interest and the ability of the first spouse to die to control the disposition of his or her property after the death of the surviving spouse, which is of course the primary advantage of a QTIP trust.
The likelihood for conflict depends on:
• The relationships between the settlors and the designated remainder beneficiaries.
• The assets and income of the surviving spouses from sources other than the QTIP trust.
• Inability to Obtain Funds to Make Tax Advantageous Gifts: Even though the requirements for QTIP trusts to qualify for the marital deduction do not prohibit granting powers to the surviving spouse to withdraw principal from the trust, the typical QTIP trust does not grant liberal withdrawal powers to the surviving spouse. Such withdrawal powers, if granted, might be exercised by the surviving spouse to defeat the objectives of the first spouse to die regarding the division of the remainder interest upon the death of the surviving spouse. Due to the surviving spouse’s lack of withdrawal powers, he or she may not be able to obtain from the QTIP trust the necessary funds to make inter vivos gifts to the next generation, even when the gifts would fall within the annual exclusion. This is inconsequential if the surviving spouse has access to other assets with which to fund the gifts.
Reasons You Should Consider A QTIP Trust
• Creditor protection: To the extent your spouse’s access to the trust funds is limited; it’s protected from her creditors. For complete protection, either your spouse must have no access to principal or the access needs to be controlled by an independent trustee.
• Second spouse or gold-digger protection: If the surviving spouse owns all of your combined property in his name, it will be at risk if he becomes remarried, whether to someone he is with for decades or a late arrival in his declining years. A trust can ensure that at least a portion of your property will pass to your children and grandchildren.
• Second marriage Or you may be in a second marriage
• Estate tax reduction: With portability, only the richest American couples—those with more than million—need to be concerned with the federal estate tax. But if you’re one of those, you can shelter even more by using a QTIP trust because the growth of the investments in your trust won’t be taxed in your spouse’s estate even if the trust and her holdings together add up to more than $11 million. More relevant, however, for Utah residents where the estate tax kicks in at $1 million, you can use a QTIP trust to shelter that much, plus its growth after your death, from taxation upon your spouse’s death.
• Capital gains tax reduction: This part is complicated. If you leave everything to your spouse, what you leave her will get a step-up in basis when you die and another when he dies. That’s the best result for purposes of capital gains taxes and doesn’t require a trust. However, if you leave $1 million in a so-called “credit shelter” trust for purposes of estate tax planning, it will not get a second step-up in basis upon your spouse’s death. A QTIP trust allows you to have your cake and eat it too—estate tax protection and a step-up when the second spouse dies.
• Scam protection: Seniors are increasingly becoming the targets of scams, whether being threatened with prosecution if they don’t pay taxes they don’t owe, importuned to send money to take care of a grandchild stranded or jailed overseas, or needing to send money to collect lottery winnings. If your spouse has limited access to the trust funds when he gets older, those funds will be protected from such scams and if he tries to gain access to them, the co-trustee will become aware of what’s going on and act to prevent any additional loss of savings.
• Incapacity planning: This overlaps with scam protection. We all run the risk (or likelihood?) of losing mental acuity when we get older. This makes us targets of financial predators, but less drastically, it may mean that we stop paying bills, pay bills twice or more often, or lose track of our investments. We’ve often seen clients become confused and overwhelmed by simple bill payment. We’ve also seen them being resistant to accepting help or any loss of control. While we recommend durable powers of attorney and revocable trusts to all of our clients, leaving your assets in trust for your spouse can ensure that a co-trustee is available when needed no matter how resistant he may be to accepting help when needed. Not all of these potential benefits of QTIP trusts will apply in every situation, but enough may be relevant to you and your spouse to take advantage of this estate planning tool.
Q-Tip Trust Lawyer
When you need legal help with a Q-TIP Trust in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506