The qualified terminable interest property trust or QTIP trust is sometimes also referred to as a marital qualified terminable interest property trust. This trust is established to provide a surviving spouse with lifetime income that is derived from money that is earned by the assets that are transferred to the trust. Typically, the surviving wife or husband is not permitted to access the trust’s principal funds or any of the property that is held by the trust. When the surviving spouse passes away, the assets within the trust will pass to the beneficiaries that are named within the trust instrument.
The property within the trust qualifies for marital deductions. Thus, the value of the trust is not subject to state or federal estate tax upon the first spouse’s death, but is rather postponed until the death of the surviving spouse, when the estate will become taxable.
The Internal Revenue Service has staunch regulations that govern the QTIP trust instrument and related documents. Even a smaller error in the language of the instrument could cause it to be deemed invalid, and subject the trust to estate taxation. For this reason, and because IRS regulations and state laws pertaining to QTIP trusts can change, it is always advisable to have a QTIP trust reviewed by a qualified estate planner.
The qualified terminable interest property trust is typically designed to ensure that the property within the trust passes to the chosen beneficiaries or heirs. The chosen beneficiaries are usually the children of the couple, or sometimes children from a former marriage. For instance, a wife may establish a QTIP trust to provide income for her second husband when she dies, and she will name the children from her first marriage as her beneficiaries. The second husband will get income from the trust, like dividends from stocks that are transferred to the trust. The husband will not be able to sell the stocks or transfer them. This will ensure that the husband cannot use the assets within the trust to benefit anyone else. When he dies, the ownership of the stocks will pass to the beneficiaries that are named in the trust, namely the children of the wife’s first marriage.
A QTIP trust is also useful in protecting assets from any creditors of the surviving spouse. Because the spouse does not actually own the assets within the trust, no creditor of the surviving spouse can attach a lien to the trust or the trust property. A QTIP trust can be useful when a surviving spouse has some difficulty in handling money or is financially irresponsible.
There can be one or more trustees named for the trust. The trustee can be an attorney who helps to prepare the trust instrument and establish the trust, a bank or financial institution, a financial advisor, family member, or friend. The surviving spouse can also serve as a trustee. The trustee must be a person who is responsible and honest since they will be in control of the trust and have the authority to decide how to use the trust assets.
It is notable that when there is not sufficient income to support the surviving spouse from the trust, that the trust can be structured to help pay for the spouse’s health care, living expense, and cost of education.
To learn more about the benefits of a QTIP trust, consult a professional estate lawyer. An attorney can explain the requirements of a QTIP trust and create the documents in a way that is most favorable for your financial situation and personal wishes, and in compliance with the IRS requirements.
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