Is a QTIP Trust Right for Your Situation?
A QTIP trust is a legal vehicle through which a deceased spouse can ensure the lifetime income of a surviving spouse. An estate planning lawyer may recommend a QTIP trust when the estate of at least one of the spouses is likely to exceed the exclusion amount and therefore be taxable. However, a QTIP trust is also an effective tool through which you can provide for a surviving spouse while ensuring that your wealth will eventually be inherited by beneficiaries you’ve chosen, such as the children of that or a previous marriage.
What Is a QTIP Trust?
QTIP is an abbreviation for qualified terminable interest property. A QTIP trust is a type of testamentary trust, which means that it triggers when the grantor dies. It is also an irrevocable trust, which means that it cannot be altered once it has been established. There are three main purposes of a QTIP. A QTIP trust provides income for a surviving spouse while preserving any remaining inheritance for other chosen beneficiaries. In the cases of high net worth, a QTIP trust can reduce estate taxes. The third purpose is to provide certainty through the irrevocable nature of the trust.
The Upsides of a QTIP Trust
A QTIP trust is an effective way to ensure that a surviving spouse has income throughout their remaining life. These trusts also preserve assets for other beneficiaries. A QTIP trust may be established to protect inheritances for children of a previous marriage or to protect inheritances for children of the current marriage should, for instance, the surviving spouse remarry. This approach can also reduce estate tax as certain aspects of the assets are removed from the exclusion amount calculation due to the marital tax deduction and because any estate taxes are delayed until the second spouse passes.
The Downsides of a QTIP Trust
The irrevocable nature of a QTIP trust can present significant challenges should the grantor’s financial or family situation change dramatically. A QTIP trust can also be restrictive for the surviving spouse as it only gives them access to income from the assets and not the principal itself. If the assets are not generating income, however, the surviving spouse has the right to instruct the trustee to convert them into profitable assets. Finally, QTIP trusts are complex and often require the trustee to be an estate planning lawyer in order to meet all of the tax filing requirements.
How a QTIP Trust Is Set Up
QTIP trusts are established by making a QTIP election via form 706 of an IRS estate tax return. This is simple in concept but generally requires the assistance of professionals in order to ensure that all appropriate assets are listed correctly. There are some criteria as well. The surviving spouse must be a U.S. resident and must receive income from the QTIP at least once a year. You must also appointment a trustee to manage the trust.
QTIP Trusts vs. Alternative Trusts
A qualified domestic trust or QDOT is an alternative for couples in which one spouse is not a U.S. citizen. A marital trust splits the inheritance between the surviving spouse and other beneficiaries at the time of the grantor’s death. It also provides the surviving spouse much greater control over any assets. A grantor retained annuity trust or GRAT is another type of irrevocable trust but one that pays an annuity to the grantor. When the grantor passes the assets and capital gains go to the beneficiaries but generally do not trigger estate tax.
QTIP Trust Assistance in New Jersey
If you live in Hackensack or any of the surrounding areas of New Jersey and would like to establish a QTIP trust in order to protect your family, the Knee Law Firm is here to help. We are an AV-rated law firm with more than 60 years of experience helping clients plan and manage their estates. Call our office at 201-996-1200 or contact us online to schedule a consultation with an estate planning attorney.