When Would I Use a QTIP Trust?
Qualified Terminable Interest Property Trust
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What is a Qualified Terminable Interest Property Trust?
A Qualified Terminable Interest Property trust, commonly known as a QTIP trust for short, is a type of marital Trust that offers flexibility in planning for your spouse and remainder beneficiaries upon your death while also providing estate tax planning if needed.
A qualified terminable interest property trust (also known as a “Q-Tip” trust) is a trust provision included in a will or revocable Trust used by married couples to provide post-mortem flexibility in estate planning to avoid or avoid minimize federal estate tax. Accordingly, all or some of the testator’s estate can be distributed to the Q-Tip Trust for the use and benefit of the surviving spouse. After the date of death, the Internal Revenue Code allows the executor to decide how much of the Q-Tip Trust will be protected from taxation through the marital deduction and how much will be protected from taxation through the unified credit. This will allow the executor certain post-mortem estate planning choices in the Federal Estate Tax Return (IRS Form 706), which the executor can use to decrease or eliminate the federal estate tax burden on the family.
Consequently, QTIP trusts are popular in second marriages because, unlike traditional marital beliefs, which give the spouse broad authority to use trust income and principal in any way they choose during their life and may even permit the surviving spouse to change the beneficiaries at their death, a QTIP is essentially a means to provide in some way for the spouse, but ensures that whatever is left at their end is distributed to the first spouse’s chosen beneficiaries.
An Example of a QTIP Marital Trust
For example, a husband dies and leaves assets to his wife, to whom he has been married for 20 years, in a QTIP trust. He has two children from a previous marriage. The QTIP trust names his wife and his son as Co-Trustees. The Trust gives all the income earned to his wife and allows for principal distributions to her for her health, education, maintenance, or support. At her death, whatever is left in the Trust shall be distributed to his children. By structuring his estate plan this way, he provides the necessary support for his wife during her lifetime but ensures that anything remaining goes to his children.
At a minimum, QTIP trusts must at least give the surviving spouse an income interest for life. They may also provide for principal distributions, such as health, education, maintenance, and support, but are not required to provide the same. Nonetheless, at the second spouse’s death, all assets would be distributed to the beneficiaries listed in the original trust agreement or Will.
Although a QTIP trust may be drafted to provide very little to the surviving spouse, they can still qualify for the unlimited marital deduction for estate tax purposes if a QTIP election is made on the decedent spouse’s estate tax return. You can even choose to make the election for certain assets in the QTIP trust but not others. This allows the estate’s fiduciary to do estate tax planning and maximize both the federal and CA estate tax exemptions.
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QTIP Trusts, Medicaid, and Supplemental Needs Trusts
It is important to note that because some QTIP trusts may provide for principal distributions, they are not necessarily protected for Medicaid purposes. Medicaid can be applied to cover the cost of long-term care services not otherwise covered by Medicare and Secondary or Supplemental Health Insurance.
To be eligible for Medicaid, an applicant must have limited resources. The Medicaid regulations provide that any trust in which a beneficiary is entitled to the principal, other than a validly created Supplemental Needs Trust, is considered an available resource to a Medicaid applicant. Nonetheless, if Medicaid planning is a goal, you should have your QTIP trust reviewed by an experienced Trust Attorney to see what options may be available to make revisions. This must be stated again: The drafting and implementation of a Q-TIP trust should only be handled by a passionate trust attorney with many years of experience in drafting sophisticated trusts.