Many people choose to incorporate at least one trust agreement into their comprehensive estate plan. If you are married, you may benefit from the addition of a QTIP or QDOT trust. To help you decide which one is right for you, the Los Angeles trust attorneys at Schomer Law Group, APC discuss the difference between a QTIP and QDOT trust.
What Is a Qualified Terminable Interest Property (QTIP) Trust?
Any married couple can make use of a QTIP trust; however, it is most often used to handle the distribution of assets in a blended family. If you were married previously and have children from that marriage, you probably created reciprocal estate plans. You left all your assets to your spouse with the understanding that he/she would then pass those assets on down to your children upon death and your spouse did the same. Now that you are remarried, however, that strategy no longer works. The dilemma you now face is that you likely want to provide for your current spouse while still setting aside assets for your children from your first marriage. You could leave everything to your current spouse and trust that he/she will leave those assets to your children upon death. Not only does that require a tremendous amount of trust in your spouse, but it also does not account for a whole host of intervening problems that could deplete the assets you intend to be passed down to your children. Your children could wind up with nothing.
A QTIP trust may be the answer to your dilemma. A QTIP trust is designed to provide for your spouse while protecting your children’s inheritance. You will need to appoint a Trustee to oversee the administration of the trust and to manage the trust assets. Assets transferred into the QTIP trust are not actually gifted to your current spouse when you die. Instead, your spouse receives income from the trust assets but cannot withdraw the principal from the trust nor can he or she decide on the ultimate disposition of the trust assets. In the case of real property, your surviving spouse may also receive a “life estate” in the property, meaning that he or she may remain in the home until death, but will never own the property outright. When your surviving spouse dies all assets held in the trust are then transferred to the intended QTIP trust beneficiaries, typically your children from a previous marriage. Although a QTIP trust does not qualify to use the Marital Deduction rule to defer federal gift and estate taxes under traditional tax rules, the Executor of your estate can elect to use the deduction on your estate tax return.
What Is a Qualified Domestic (QDOT) Trust?
As the name implies, the unlimited marital deduction allows you to leave an unlimited amount of assets to a spouse tax-free. Unfortunately, the deduction is not available to a non-citizen spouse though. The reason behind this is simple. The unlimited marital deduction sounds great; however, all it usually does is delay the payment of gift and estate taxes. Ultimately, the surviving spouse ends up paying the tax debt when he/she dies. If the surviving spouse is a non-citizen though, there is a very high probability that the assets will be moved out of the country prior to his/her death and Uncle Sam will not receive anything. To protect against this happening, the deduction cannot be used if your spouse is a non-citizen.
A QDOT provides a solution to the problem created by the exception to the unlimited marital deduction. With a QDOT, you are able to transfer all assets intended for your spouse’s benefit into the trust and your spouse will be entitled to the interest from those assets but will not own the assets. Your spouse will not be entitled to access the principal held in the trust unless he/she can demonstrate a hardship need. The only time your spouse can access the principal is if your spouse can demonstrate an “immediate and substantial” need for money relating to “health, maintenance, education or support” of either your spouse or someone your spouse is legally obligated to support, such as a child. Upon the death of your surviving spouse, the assets held in the trust will be distributed to the beneficiaries named in the trust, usually children and/or grandchildren. If any federal and/or state estate taxes are due at that time they will need to be paid at the time of distribution.
Contact Los Angeles Trust Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to choose the right type of trust for your estate plan, contact the experienced Los Angeles trust attorneys at Schomer Law Group APC by calling (310) 337-7696 to schedule an appointment.
Cesar has received his Masters of Science in Integrated Design, Business and Technology from the University of Southern California.
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