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In the United States, a Qualified Terminable Interest Property (QTIP) Trust, also known as a marital QTIP trust, is set up to provide someone’s spouse with income for life. The surviving spouse receives income earned from the assets placed in the trust. Generally, the surviving spouse does not have access to the principal funds or property in the trust. When the surviving spouse dies, ownership of the trust’s assets passes to the beneficiaries named in the trust.
The property in the trust is qualified to take advantage of marital deductions. This means that the value of the property in the trust will not be subject to state and federal estate taxes when the first spouse dies. Estate taxes are only postponed. QTIP trust assets are subject to estate taxes when the second spouse dies.
The IRS and different states have very strict rules regarding the QTIP trust form and documents. A small error in the wording of the trust document could invalidate it. If the trust is ruled invalid, assets in the trust can be subject to estate taxes. IRS regulations and state laws can change. An attorney should always review current state and federal laws when setting up a QTIP trust.
QTIP trusts are usually set up to ensure that the property passes to the beneficiaries. Usually, beneficiaries are the couple’s children, or the first spouse’s children from a previous marriage. For example, a husband sets up a QTIP trust to provide income for his second wife when he dies. The husband names the children from his first marriage as beneficiaries.
The second wife gets the trust income, such as dividends earned from stocks placed in the trust. The wife cannot sell or transfer the stocks. This ensures that the wife cannot use trust assets to benefit a new spouse, her children from a previous marriage, or her children from a new marriage. When the wife dies, ownership of the stocks passes to the late husband’s children from his first marriage.
QTIP trusts also protect assets from the surviving spouse’s creditors. Since the spouse does not own the assets in the trust, creditors cannot attach liens to the trust property. QTIP trusts can also be used if the surviving spouse is inexperienced with handling money.
One or more trustees can be named in the trust. The trustee can be the same attorney who set it up, a different attorney, an experienced financial advisor, a bank, a family member, friend, or even the surviving spouse. This must be a responsible person since the trustee will control the QTIP trust.
The trustee has the authority to make decisions on how to use the trust assets. Sometimes, the trust income is not enough to support the surviving spouse’s needs such as living expenses, health care costs, and education expenses. In this case, the trustee has the authority to distribute some of the trust assets to the surviving spouse.
A downside of QTIP trusts is the cost to set up and maintain them. The QTIP trust form and documents must be created by an attorney, who will typically charge fees for such work. An accountant, who may also charge for his advice, is usually consulted as well. Additional fees are incurred because, when the person who set up the trust dies, the trustee who runs the QTIP trust is also paid.
The trustee (surviving spouse) wants to change what charity receives the trust if the child of the first spouse(the one who left the money) dies before the surviving spouse dies. Is it possible for them to make this change?
There are other types of trusts that someone can use to protect their assets too, right? I mean, I keep hearing about things like revocable trusts, life insurance trusts, annuities, simple life insurance policies, all that. I don't really know what would make one of those better to use than another though -- does it depend on the size of the estate?
Does anyone know when it is best to use one over the other?
Though state and federal laws and regulations can change thankfully QTIP trust requirements basically stay the same. Essentially, you have to have a large estate where the bulk of that estate is put into the trust. The grantor must be a U.S. citizen, married and qualify for the married deduction rule.
This rule also states that there is a deference of estate taxes to death taxes on outright transfers of wealth and estate assets between spouses. In laymans terms, the taxes are deferred until the death of the grantor. At this point the surviving spouse must have authority on the assets transferred. Any non-income producing assets need to be changed into income producing assets. The executor of the
trust must file a 706 form in compliance with the IRS.
Confusing, right? Even though the rules don't change, they're still crazy complicated, so if you are thinking about starting up a QTIP trust, then make sure you talk with your lawyer first.
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