You may already be familiar with trusts as part of the estate planning toolkit. However, unless you have already sought advice from an estate planning attorney, you may not be familiar with the QTIP trust.
A QTIP trust is a qualified terminal interest property trust. In this trust, when the first spouse passes away, they leave some or all of their estate to the QTIP trust. Then, the surviving spouse receives the income from the QTIP trust for the rest of their life. The trust assets themselves are not accessible, and the surviving spouse can only access profits. Once the surviving spouse passes though, the ultimate or final beneficiaries (usually children or grandchildren) receive the trust assets in their entirety.
Benefits and flexibility
The first spouse’s estate is not taxed. This is because of the unlimited marital deduction. Plus, since the estate executor determines how much of the estate goes into the trust, a will does not have to specify an amount or percentage. Further, as the underlying assets cannot be touched by the surviving spouse, bad investments and greedy creditors cannot affect the assets that will eventually be inherited by the ultimate beneficiaries.
The biggest disadvantage, though, is also one of its advantages: the underlying assets cannot be touched by the surviving spouse. If the point is to allow the surviving spouse to live off the income of the trust, but the trust stops providing a sufficient income – for instance, during our current economic downturn – then the surviving spouse cannot access the underlying assets. For example, if the assets are rental properties, and there is no rent currently coming in, the surviving spouse does not have the option to sell the properties.
This is just one example of a trust, which is only one tool in the estate planning toolkit. An estate planning attorney can help you assess what type of trust would work best for your situation.