Estate taxes are assessed on the value of your assets including your retirement benefits, real estate, and life insurance. At the time of this newsletter, the federal estate tax exemption is currently $13.61 million per person for deaths in 2024. In 2026, the that exclusion amount will revert to the 2017 level. That would be about $5 million per person as adjusted for inflation, unless congress makes further changes. With the estate tax exemption amount dropping, planning to minimize estate taxes has become top of mind for more people. Fortunately, there are many tools estate planning attorneys can use to minimize those taxes. One of these tools, is a QTIP trust.
What is a QTIP trust?
A qualified terminable interest property trust (also known as a QTIP Trust) is a type of irrevocable trust. At it’s base level, a QTIP trust is similar to an A/B trust or a disclaimer trust, just with more restrictions.
As mentioned before, to be QTIP-able the trust must be irrevocable. This means no-one, including the trustor, has the authority to revoke it. The trust must also be fully for the benefit of the spouse during the spouse’s lifetime. This means that while the spouse is alive, the trustee must be unable to make distributions to other beneficiaries. This means no income or principal can be distributed to children, charities or other any other person or entity. The spouse must also be entitled to all of the income of the trust. Finally, the surviving spouse must be able to compel the trustee to turn unproductive assets, into productive assets. If all of these requirements are met, then the trust is QTIP-able. From there, it is up to the personal representative of the estate to elect QTIP status when filling out Form 706 on the Trustor’s death.
QTIP trusts are useful for tax planning.
QTIP trusts are usually appealing to married couples with large estates or with estates that may be at risk of passing the estate tax threshold. The appeal of QTIP trusts lies, in part in that flexibility in tax elections. QTIP trusts allow the personal representative (or whoever is signing the 706 tax form) to elect to claim the marital deduction on the death of the first spouse. The election is not necessarily mandatory so, if the value of the estate goes down or the exemption amount rises, the personal representative can opt not to claim the marital deduction. By providing them the option of electing the marital deduction, QTIP trusts offer your personal representative the flexibility to assess the value of the estate on your death and make the right decision at the time.
QTIP Trusts appeal to mixed families.
QTIP trusts also appeal to couples with mixed families because they allow a trustor to provide for the surviving spouse during the spouse’s lifetime, while also directing where trust assets go after the death of that surviving spouse. Often times, the trustor wants to provide for their spouse, but also ensure that if they die first, their kids and heirs are provided for.
QTIP trusts allow the trustor to provide for the surviving spouse during their lifetime. But, QTIP trusts also prevent the surviving spouse from changing the beneficiaries after the trustor has died. Instead, the trustee distributes assets according to the trustor’s wishes expressed in the trust once the surviving spouse dies. Once the trustor dies, the trustee distributes any trust income to the surviving spouse at least annually. The trustee holds the balance of the trust estate for the benefit of the spouse during their lifetime. On the death of the surviving spouse, the trustee distributes the remainder of the trust estate to the beneficiaries determined by the trustor.
You should consult with an attorney to determine if a QTIP trust is a good fit for your estate plan.
