Financial Advice for Retirement, Social Security, IRAs and Estate Planning

Is the “QTIP Trust” Right for Your Estate Plan? Part II

Published on: Sep 24 2019
estate planning

In last week’s edition of Retirement Watch Weekly, I introduced my readers to Qualified Terminal Interest Property (QTIP) trusts. Today, we’ll examine the most ideal situations in which to use them.

1. At least one spouse has children from a prior marriage, and that spouse wants to ensure that those children get at least a minimum amount of property after both spouses are gone.

2. You are concerned that your spouse might remarry after your death and leave the estate to the new family.

3. You want some of your property to go to someone other than your children (brothers, sisters, other relatives, friends) after your spouse’s passing and are not confident your spouse would make the same choice.

4. You want to ensure that the property eventually is inherited by members of your immediate family and not by relatives or friends of your spouse.

The QTIP trust should supplement other strategies since your spouse will be receiving only income from the trust.

You can set things up so that the trustee can use some of the principal to meet emergencies of your spouse, but then you have to define the emergencies or hope that the trustee won’t use the property in ways you wouldn’t want.

So the best approach is to ensure that your spouse has other assets or sources of income in addition to the QTIP trust, then set up the QTIP so that your spouse will get all the income and your children (or others you favor) will inherit its principal.

A QTIP trust should be drafted by an experienced estate planner.

The tax law has very precise requirements for QTIP status.

Many estates had to pay unexpected taxes over the years because of stray words or phrases in wills or QTIP trusts.

Also, not all types of assets are appropriate for QTIP trusts.

For example, the IRS argues that it is virtually impossible for a trust to qualify as a QTIP if it owns an IRA or other pension plan.

Of course, the trust won’t do your spouse any good if the trust property does not produce income, so it should hold income-producing property.

A QTIP trust is an estate planning mainstay.

It could take burdens away from your spouse, ensure that your children or other loved ones eventually are cared for, and also provide for your spouse.

And it can defer estate taxes.

That’s why it should be considered for your estate plan.

There are several potential disadvantages to the QTIP.

If too much wealth is put into the QTIP trust, the income payments to the surviving spouse could cause his or her estate to continue increasing, triggering higher estate taxes down the road.

Fully funding the QTIP trust also means no one other than the surprising spouse benefits from the estate of the first spouse to pass away.

Another potential disadvantage for a very valuable estate is that the trust might grow in value to exceed the surviving spouse’s exempt amount and the unused exempt amount of the first spouse to pass, triggering substantial estate taxes on the surviving spouse’s death.

This problem could be reduced by giving the spouse and trustee the discretion to take principal out of the trust, even for the purpose of giving it to others.

P.S. Recently, I completed new research on what I consider the seven most critical retirement decisions a person can make. Get them wrong and you’ll find yourself in the poorhouse. Get them right and you’ll find yourself cruising the Caribbean with a pile of dividend checks waiting for you.

Click here now to see what the seven decisions are, and learn how to make the right choices.

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