QTIP Trusts Help Provide Peace of Mind
February 15, 2008Unless you provide otherwise in your will or living trust, when you die your assets (or at least part of them) will be transferred outright to your spouse -- free of estate tax. Your spouse will then totally control the assets.
But what if you don't want your spouse to have so much control? Let's say, for example:
- You believe your spouse is incapable of managing money wisely,
- You want to guarantee that your children from a previous marriage will receive a portion of your estate when your surviving spouse dies, or
- If your spouse remarries, you don't want your estate transferred to the new spouse when your spouse dies.
In these cases, you might prefer that a third party manage all or some of your estate assets for your surviving spouse. That third party could be a competent financial advisor or financial institution that will make smart decisions about using and investing the assets.
An excellent way to accomplish this is to set up a special type of marital trust -- a qualified terminable interest property (QTIP) trust. This kind of trust provides an income to your surviving spouse, but restricts his or her use of the trust's principal assets. This restriction will ensure that when your spouse dies, your remaining assets will be transferred according to your wishes -- not your spouse's.
How the Trust Works
To create a QTIP trust, you instruct your executor in your will (or revocable trust) to create and fund a trust at your death.
Your appointed trustee manages the assets according to your instructions. Your surviving spouse must receive at least annually all income earned by trust assets. You decide whether or how to restrict your spouse's access to trust principal.
For example, do you want to allow your surviving spouse to take trust principal at any time, without restriction? Or to take trust principal only if needed for healthcare, education or other necessary expenses that you designate in the trust document? Or would you prefer to give the trustee sole discretion to decide when and how much principal to distribute to your surviving spouse? A QTIP trust protects the assets in it to a large degree from creditors, and the assets usually avoid probate when your surviving spouse dies. But all remaining trust assets are subject to estate tax when your spouse dies.
Customize Your Marital Trust
You can exercise a lot of flexibility when you draft instructions for setting up a QTIP trust and you can tailor the trust terms to your needs. But consult your attorney to make sure the trust is enforceable and achieves your objectives.
A QTIP trust provides an income to your surviving spouse, but restricts his or her use of the trust's principal assets.
QTIP Trusts for Blended Families
Suppose you're in a second marriage and you have children from your first marriage. A QTIP trust is an especially attractive option for you.
If you die without a QTIP trust, your second spouse could pass all remaining trust assets to his or her own children from a former marriage, leaving nothing to your children.
The QTIP trust provides income for your surviving second spouse throughout his or her lifetime, but restricts his or her use of trust principal.
By naming your children from a previous marriage as beneficiaries of your QTIP trust, you can ensure that all remaining trust assets pass to your own descendants.
