Estate planning is brimming with acronyms. The QTIP Trust is yet another, though perhaps one of the easiest to remember. It stands for “Qualified Terminable Interest Property” Trust, and it is very helpful for couples who desire to leave property to one another, while saving as much on estate taxes as possible.
The Irrevocable QTIP Trust
A QTIP Trust is a type of irrevocable trust that is used most often to leave assets to a surviving spouse, who will in turn leave those same assets to their heirs or beneficiaries. Until the death of the second spouse, those assets remain in the QTIP trust.
A QTIP Trust Cannot be Modified
A QTIP trust will allow one spouse to bequeath a life estate in certain property to the other spouse, without incurring the federal gift tax. The only limitation is that the recipient spouse must not have an income interest in the trust, or a power of appointment over the principal.
When are QTIP Trusts most Commonly Used?
Estate planning attorneys will most often recommend a QTIP trust when the first spouse to die wants to leave assets to the surviving spouse, to be used only by the surviving spouse during his or her lifetime, and the assets exceed the federal estate tax exemption amount. The exemption amount for 2015 is $5.34 million.
The Primary Provision of a QTIP Trust
The IRS requires a QTIP Trust to contain specific language designating that the assets will qualify for the marital deduction to the federal estate tax. The language must also indicate that they will not be included in the estate of the first spouse to die. Without this language, the QTIP trust cannot properly accomplish its purpose of saving on estate taxes.
What are A, B, & C trusts?
It is common for estate planning attorneys to use an A, B, & C Trust structure when establishing trusts for married couples. The way it works is, after the death of the first spouse, three separate trusts are created: the survivor’s trust, the family trust and the QTIP trust. Trust B, which is the family trust, typically does not contain the language required to create a QTIP trust. The advantages of using this structure are as follows:
- More control for the deceased spouse
- Maximized estate tax savings; and
- Creditor protection
- Automatic QTIP Election
An automatic QTIP election can be created for particular joint and survivor annuities. In order to qualify for an automatic election, only the surviving spouse can possess the right to receive payments before death. Because the federal estate tax exemption amount is $5.34 million, as of 2015, you would only need to create a QTIP trust if your estate will exceed that amount. Even then, you would only need to hold the assets in excess of the exemption amount, in the QTIP trust.
If you have questions regarding QTIP Trusts, or any other estate planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.