Using a QTIP Trust in Estate Planning

Estate planning is crucial when managing valuable assets and ensuring the smooth transfer of wealth to future generations.

There are various types of estate planning tools available, some of which may be more useful depending on your circumstances. For some, a qualified terminable interest property (QTIP) trust may be one practical option to take into consideration. Note that this type of trust can prove especially suitable for people who have married more than once.

QTIP trusts enable individuals to maintain control over their assets while providing for their loved ones. This type of trust is an essential tool for those seeking to preserve wealth and leave a meaningful legacy.

What Is a QTIP Trust?

A QTIP trust is an irrevocable trust. It allows an individual (the grantor) to transfer assets into a trust to benefit their spouse and other named beneficiaries. What sets QTIP trusts apart is not just their ability to provide for the surviving spouse. These trusts also outline how to distribute the remaining assets after their surviving spouse’s passing.

This arrangement is especially beneficial when the grantor wants to provide for their spouse during the remainder of their spouse’s lifetime. It also ensures that the remaining assets go to designated beneficiaries, such as children from a previous marriage.

Advantages of QTIP Trusts

Asset Distribution

One of the primary advantages of a QTIP trust is the grantor’s ability to control the distribution of assets. The terms of the trust ensure that the grantor’s spouse has the financial support they need once the grantor passes away.

In addition, the trust directs how to distribute any remaining assets after the surviving spouse’s death. This preserves wealth within the family and also prevents the dissipation of assets through future marriages or other unforeseen circumstances.

Estate Tax Benefits

QTIP trusts also provide significant estate tax benefits. By transferring assets into a QTIP trust, the grantor effectively removes those assets from their taxable estate. This can lead to substantial tax savings. This is because the assets held in the trust are not subject to estate taxes upon the grantor’s death.

Instead, estate taxes are deferred until the surviving spouse passes away. This provides an opportunity for additional estate planning strategies to minimize the tax burden further.

Note that, as of 2023, federal estate taxes will apply only to significantly sized estates – those worth more than $12.92 million.

Protection From Creditors

QTIP trusts also protect assets by placing them in an irrevocable trust. This effectively shields the assets from potential creditors and legal claims. For example, a QTIP trust can be particularly valuable when the grantor or surviving spouse faces potential financial liabilities or risks. The assets held within the QTIP trust remain protected and preserved for the intended beneficiaries, even in challenging circumstances.

QTIP Trust Considerations

QTIP trusts do have some limitations to consider, however.

Because they are irrevocable trusts, you generally cannot:

  • revoke them,
    remove assets you have put into them, or
    return assets to the grantor.

Therefore, it’s crucial to plan carefully and consider the specific circumstances and goals you have for this particular kind of trust.

The surviving spouse must receive income payments at least once per year from the trust while they are alive. If the assets in the trust are not generating any income, the surviving spouse can require the trustee to convert them into assets that do generate income. Income-generating assets might include rental property, for example.

Given the circumstances that often lead to the creation of a QTIP trust, it’s usually better if the surviving spouse is not the trustee. The goal of a QTIP trust is to provide a consistent income stream to a surviving spouse while also protecting the principal for other beneficiaries, such as the grantor’s children. So, it may be best to choose a trustee who is likely to outlive the surviving spouse. An estate planning attorney or financial advisor would be good options.

Will a QTIP Trust Work for You? Consult an Estate Planning Attorney

A QTIP trust could be a valuable part of your estate plan, but it does depend on your unique situation. Creating these types of trusts can also get complicated, so be sure to work with a professional.

At Wenzel Bennett & Harris, we can talk through the benefits and requirements of QTIP trusts. An experienced attorney can help people with significant estates transfer their wealth as seamlessly as possible. We also can review other estate planning options and customize a plan which meets your needs and the needs of your family. Call us at (989) 356-6128 to schedule an estate planning consultation. Give your family the gift of good planning and get a head-start on the new year by scheduling your estate planning consultation this holiday season.

If you have specific questions about your situation or would like to learn more, reach out to the team at WBH here.

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