When it comes to estate planning, there are several different types of trust available. Deciding which type of trust you need to accomplish your goals can be challenging without some assistance. Married couples, in particular, question which types of trusts will best serve their needs. If you have heard of a QTIP trust and a bypass trust, you may be wondering which one is best. Our trust attorneys can help you make this important choice.
What is a QTIP Trust?
The acronym “QTIP” stands for “Qualified Terminable Interest Property.” QTIP trusts are most often used by married couples who want to make sure their spouses inherit their property after their death, but also want to reduce the amount of estate taxes that will be imposed as much as possible.
With a QTIP trust, spouses leave their estate to their surviving spouse and that same property is then inherited by their heirs or beneficiaries. The property remains in the trust until the second spouse dies, protecting those assets until the couple passes away.
QTIP Trusts are Irrevocable and Cannot Be Modified
A QTIP Trust is created as an irrevocable trust which means the property transferred to the trust is no longer considered your money. Once the trust agreement has been executed, it cannot be modified. If that was not the case, the assets would still be subject to your creditors.
A QTIP trust gives spouses the opportunity to bequeath their life estate in certain property as they choose to the surviving spouse without incurring any federal gift tax. The only limitation is that the spouse receiving the inheritance is not allowed to receive any income from the trust property nor retain any power of appointment as to the principal. This would allow the holder to appoint the assets to anyone, including the holder or the holder’s estate, or to the creditors of the estate.
What is Required for a QTIP Trust to be Valid?
There is actually certain language that is required by the IRS to be included in the QTIP trust in order for it to operate appropriately. The trust agreement must specify that the trust assets qualify for the marital deduction to the federal estate tax and also indicate that the trust assets will not be included in the estate of the first spouse to die. If you do not include this language, the QTIP trust will not be able to accomplish the goal of eliminating or reducing estate taxes.
What is a Bypass or AB Trust?
Another common choice married couples can consider is the bypass trust, also known as an AB trust. With a bypass trust, there are three separate trusts created upon the death of the first spouse. One trust, the A trust, is created for the surviving spouse. The family trust, or B trust and a QTIP trust are also created. There are many advantages to creating this type of trust structure. Those advantages including maximizing on potential estate tax savings, benefitting from asset protection, and making an automatic QTIP election.
How Does a Bypass Trust Work?
When you include property in a bypass trust, that property no longer belongs to the surviving spouse. On the other hand, the surviving spouse will retain the right to use the proper and receive income from it during the spouse’s lifetime. The only limitation is that the value of the trust assets must stay below the federal estate tax exemption amount or estate taxes will be imposed. The estate tax exemption in 2019 is $11.4 million.
All remaining property is transferred into the revocable survivor’s trust. Unlike a bypass trust, the surviving spouse has complete control over the property and can spend it, bequeath it to beneficiaries, or give it away as gifts. No estate tax is imposed on this property because everything left to the surviving spouse is free from estate tax. Upon the second spouse’s death, the property in the bypass trust is then transferred to the final beneficiaries tax-free. IN most cases, the couple’s children receive the assets in the bypass trust.
What is an Automatic QTIP Election?
An automatic QTIP election is created for specific types of joint and survivor annuities. To qualify for this election, the surviving spouse must be the only person who can receive payments before death. Since the federal estate tax exemption amount is $11.4 million as of 2019, spouses would only need to take advantage of this election if the value of the estate will exceed the exemption amount.
Join us for a free seminar today! If you have questions regarding estate planning, trust contests, or any other trust administration issues, please contact the Schomer Law Group either online or by calling us in Los Angeles at (310) 337-7696, and in Orange County at (562) 346-3209.
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