A Qualified Terminable Interest Property (“QTIP”) Trust is a common estate planning tool in second marriages. Essentially, a QTIP trust ensures that a person’s assets will go to their children (or other next of kin) rather than to their new spouse, while providing an income stream to the new spouse. The Trustee of the QTIP can also have some discretion to distribute principal to the new spouse, if necessary. One of the problems the QTIP seeks to remedy is in the case of where one person dies, leaving all or most of their assets to their spouse, assuming that spouse will then leave the assets to the first person’s children. Not too infrequently, the new spouse may not have a close relationship with his or her stepchildren and, so, changes his/her will to eliminate them. The QTIP is a great way to protect those children but still make provision for the spouse.
One tax advantage of the QTIP trust is that it serves to defer any estate tax due from the assets in the trust until the second spouse passes. If the spouse is a U.S. citizen, then the assets that pass into the QTIP trust are covered by the marital deduction and do not cause an estate tax to be levied on the death of the first-to-die spouse.
There are other benefits to the QTIP trust. For example, if the surviving spouse is only to receive income from the trust, and has no ability to access principal, then in that event the assets in the trust should be considered unavailable for medicaid purposes, if that spouse should need long-term care at some point down the road. Thus, even in first marriages, where there are common children, the QTIP trust can serve to protect assets. Lastly, more and more clients seem concerned, even in first marriage situations, that one of them may become susceptible to the influence of home health aides, friends, strangers, and others, and thus make poor financial decisions. The QTIP trust can be a very effective tool for preventing this from happening.