Projecting the amount an investor will possess at the time of their death and the portion liable for federal estate taxes has always been an intricate process. Generous estate tax exemptions and the ability to transfer the deceased spouse’s unused exemption amount have made estate planning considerably easier for many wealthy couples. However, factors like second marriages, children from previous marriages, generational family wealth, questions about which partner will outlive the other, the potential for remarriage, and various subsequent life events keep the unpredictability of estate planning at the forefront.
While estate taxes can often be managed within current laws, what if there are assets you want to preserve within the family? Perhaps you anticipate your surviving spouse will remarry, and you want to prevent the new spouse from gaining rights to family property. Alternatively, you might have children from a previous marriage and want to ensure they receive their inheritance. A Qualified Terminal Interest Property (QTIP) trust is an estate planning tool that can maintain assets within the family bloodline.
A QTIP trust is designed to provide financial security to your surviving spouse while allowing you to control the ultimate distribution of your assets. This unique trust arrangement transfers income producing assets into the trust, such as investment properties or taxable investment accounts, either at the time of its creation or upon your passing. The structure ensures your spouse receives all the income from the trust for the remainder of their life. The trust also permits the surviving spouse access to any houses or property in the trust, though selling the property is prohibited. As the grantor, you can specify whether payments can be made from the principal.
A QTIP trust never grants your surviving spouse ownership of the assets while they are living, thereby preventing them from transferring assets to a stranger should your spouse remarry. You may only give your spouse a “limited power of appointment” to direct how remaining QTIP assets are distributed at their later death (limited to your own descendants).
What sets the QTIP trust apart from other trusts is its strategic ability to delay the final distribution of assets until your spouse’s death. At that point, the trust assets are then passed down to predetermined beneficiaries, often children from a previous marriage or other heirs. As QTIP trusts qualify for the IRS marital estate tax deduction, the trust property only becomes taxable after your surviving spouse’s death, with liability transferring to the named heirs.
The drawback of the QTIP trust is its irrevocability. Should your family’s financial situation change, the assets become untouchable, as no other beneficiaries can be named until your surviving spouse passes away.
The advantages of a QTIP trust include flexibility in tax planning and protection of assets from potential creditors, lawsuits, and current and former spouses. The QTIP trust ensures that your intentions are upheld regarding asset distribution, making it an indispensable tool for individuals seeking to optimize financial security and legacy planning.
If you have questions regarding your estate plan and if a QTIP trust may be appropriate for your family, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
Listen to the August 12, 2023 “Henssler Money Talks” episode.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
