Is A QTIP Useful For More Than Earwax? (You’ll Be Surprised!)

Wealth Legacy GroupSay the word “Q-tips®” and the first thought most will have is of the ubiquitous cotton swab by Unilever. A QTIP Trust (Qualified Terminable Interest Property Trust), however, is a special kind of trust which allows an individual to do two very important things with their assets. And, for those of you with children from a prior marriage and now remarried where you plan to provide financially after your death – you will want to pay especially close attention! Providing financially for loved ones who often have conflicting interests – and using the same planning tool to do so . . . “Imagine That™”!

What’s The Background?

According to recent statistics, four out of every ten families in the U.S. are blended families. In our planning with clients, we find increasingly that there are children in their lives from a prior spouse/relationship, but the client(s) are now married to someone new. While (hopefully) the relationships between these loved ones are warm, more often they are in conflict with one another . . .  especially financially. So, how is one to provide financial support and income to a new spouse, while not potentially disinheriting children from a prior relationship? As well, how can potential federal estate taxes or other death taxes be postponed and not payable at the death of the first spouse to die? A Gordian knot for many years, but now resolved by a special trust with the funny acronym of QTIP.

What Is It Exactly And How Does It Work?

It is an “irrevocable trust” (i.e., a trust that generally cannot be easily amended or terminated.) It is only available to married couples, and the surviving spouse must be a U.S. citizen. It is set up by an individual called a “grantor” to provide benefits to their spouse should they survive them. The surviving spouse is required to receive income for the rest of their life and the income stream cannot be turned off for any reason other than death – not for divorce, incapacity, or remarriage. The surviving spouse does not have a “general power of appointment” over the assets. That is, upon the death of the surviving spouse, the assets must be paid to the successor beneficiaries named in the QTIP Trust by the grantor.

This is a key point. Should a surviving spouse remarry, they may be married for many years to a new spouse themselves. They might even have children with this new spouse or otherwise be tempted to leave assets from their deceased spouse to this new spouse and/or children. The QTIP Trust, however, will not allow this to happen. The original spouse can be confident that their original intentions will be honored. They can provide income (and use of certain assets such as a home) to their spouse for the rest of their life. As well, the grantor can also provide assets to their children or other intended beneficiaries (philanthropic or not) without risk of them being disinherited or having the grantor’s wishes thwarted.

The other key benefit of this trust is the ability to defer the recognition of any death taxes – assessed by the federal government or by a state – until the death of the second spouse. A traditional “Marital Trust” may allow for control over trust assets and the designating of final beneficiaries by the surviving spouse (what some may wish to avoid). The QTIP Trust provides, however, the surviving spouse with a life estate, extending only to select circumstances for limited access to the trust’s principal. This arrangement also serves to protect the principal from creditors of the surviving spouse, as well as potentially allow for the safeguarding of trust assets from adverse financial decisions. For example, a third-party can be appointed as the Trustee to manage the assets, if necessary.

For some individuals, there are clear personal benefits in implementing a QTIP Trust in lieu of a Marital Trust, but are their financial drawbacks? The surviving spouse may not own the trust, however the QTIP Trust allows for the unlimited marital deduction as stated above (i.e., estate tax is assessed after the passing of the lifetime beneficiary, deferring any estate tax). Further, by including these assets in the estate of the lifetime beneficiary, they also receive a step-up in basis at the time of their passing. (Note: President Biden has proposed eliminating the “step-up in basis” rule. Stay tuned!) This means the grantor’s estate can enjoy some of the benefits of a marital trust, while still working to ensure the principal of the QTIP Trust is inherited by the intended final beneficiaries, potentially at a higher basis.

Conclusion: A QTIP Trust Can Provide Financial Support To Your Loved Ones, Even If They Have Conflicting Interests

In closing, the suitability of any estate planning instrument is determined for the specific needs and situation of an individual. With a QTIP Trust comes many nuances and moving parts that need to be executed and considered for the trust to be elected, implemented, and operated as intended. Most importantly, the right planning and analysis needs to be performed to determine if a QTIP Trust is the right tool to employ at all.

Each person’s circumstances and expectations for their estate are unique, and the suitability of a QTIP Trust should be determined on a case-by-case basis. QTIP Trusts make good sense to use for more than just blended families. Is it right for you and your family? Maybe! Let’s have a 20-minute complimentary conversation to discuss its potential use for your situation and any other questions you may have regarding your taxes, estate, investments, insurance, or philanthropy.

Managing the potentially conflicting financial interests of various loved ones and still deferring potentially devastating death taxes – while using the same planning tool to do so . . . “Imagine That™”!

Imagine That™! is a complimentary monthly newsletter provided by Wealth Legacy Group®, Inc. that addresses various topics of interest for high-net-worth and high-income business owners, professionals, executives and their families. 
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R. J. Kelly, Wealth Legacy Group®, Inc. – August 2021

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