Creating a comprehensive and cohesive estate plan often entails the inclusion of tools and strategies that can achieve a wide range of inter-related, though sometimes competing, goals and objectives. If you are part of a blended family, for example, you likely need to provide for your current spouse while also protecting assets intended for your children from a previous marriage. One estate planning tool that can help you do both is a Qualified Terminable Interest Property, or QTIP, trust. The Inglewood trust attorneys at Collins Law Firm explain the purpose of a QTIP trust and how a QTIP might fit into your estate plan.
How a Trust Works
If you have never before established a trust, it may be beneficial to get a general idea of what a trust is and how a basic trust works. A trust is a legal relationship where property is held by one party for the benefit of another party. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries, invests trust assets, and administers the trust using the trust terms. Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts. Because a testamentary trust is activated by a provision in the Settlor’s Will, and a Will can always be revoked up to the time of the Testator’s death, a testamentary trust is also revocable up to that point.
QTIP Trust Fundamentals
A QTIP trust is a specialized type of irrevocable trust that works well for a Settlor who is part of a blended family. If you are like most people, during your first marriage your plan was to leave all your assets to your spouse with the understanding that he/she would then pass those assets on down to your children upon death. Your spouse executed a reciprocal Will and/or a reciprocal estate plan. In essence, whoever died first left everything to the other spouse/parent and everything went to the kids when both parents were gone. That plan no longer works though now that you are divorced and remarried. Now, you want to provide for your new spouse; however, you still want some of your estate to go to your children.
One option now is to leave everything to your current spouse and count on him/her to leave those assets to your children upon death. That would require you to have complete faith that your spouse would follow your wishes instead of squandering, or otherwise depleting, the assets before the end of his/her life. The reality is that if you choose that option, after you are gone, your spouse will have complete control over those assets with no legal constraints on their use. Ultimately, your children could wind up with nothing if your spouse intentionally, or unintentionally, fails to honor your wishes. The good news is that there is another option — a QTIP trust.
A QTIP trust operates in basically the same way as any other trust. 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.
Contact an Inglewood Trust Attorney
For more information, please download our FREE estate planning worksheet. If you have additional questions about how a QTIP trust might fit into your estate plan, consult with an Inglewood trust attorney. Contact the Collins Law Firm by calling (310) 677-9787 to register for one of our FREE estate planning workshops.