What is a QTIP?

Alabama Estate Planning - QTIPA recent article regarding important estate-planning tips for attorneys to consider mentioned the importance of a powerful estate-planning vehicle with a funny acronym. The article discussed how a QTIP trust could serve as an important piece of an overall Alabama estate plan.

First things first, let’s be clear that we aren’t talking about a little stick that’s meant for your ear. QTIP stands for “qualified terminal interest property” trust. Qualified means it’s property that is qualified for the marital deduction. Terminal means the surviving spouse gets the income interest during his or her lifetime, but that interest terminates at his or her death.

This trust is especially useful in situations where one spouse has a lot of personal property and the couple is attempting to equalize their estates to make sure to take advantage of a full estate tax exemption for each. It can also be used to great benefit if one spouse wants to ensure the other is taken care of after the first spouse dies, but that the first spouse’s children ultimately inherit the remainder. The restrictive ownership provisions of a QTIP trust are particularly useful for second marriages since you may want to ensure that the amounts held in the trust will ultimately pass to your children or family and not the children or family of your second spouse.

Normally, an individual either has to pay estate taxes on the property at their death, or leave it to their spouse. Leaving it to the spouse has certain tax benefits which include making use of their lifetime exemption, as well as deferring the payment of estate taxes for the greatest amount of time possible. However, there is no guarantee that the money will ever go to the first spouse’s children or other intended beneficiaries. The second spouse has complete control over the funds left to them in the first spouse’s estate. A QTIP provides for the surviving spouse and still leaves the remainder to the first spouse’s intended beneficiaries.

During the first spouse’s lifetime, he or she can make unlimited marital gifts to his the other spouse. If they are made into a QTIP trust, the assets are qualified for the marital deduction for gift and estate tax purposes. The second spouse is provided for from the income from the trust after the first spouse passes away. The first spouse has the power to either specifically name his or her children as beneficiaries of the trust or can grant the second spouse the power to choose among a limited class of beneficiaries (the children).

Although somewhat complex, a QTIP trust can be a very useful piece of your estate plan if you value flexibility regarding the timing of estate tax payments and an assurance that assets will ultimately pass to your family.

Whether you have few assets or a multi-million dollar estate, you need to have an effective estate plan. If you have questions or concerns contact the Huntsville wills and estates attorneys at Martinson & Beason, P.C. today.

Source: “Before you build that retirement plan…” by Lloyd Lofton, published atLifeHealthPro.com.