This article looks at the topic of QTIP trusts to help you understand exactly what a qualified terminable interest property trust actually is, how it works, the advantages they offer and why you might want to use one for your estate planning purposes.
With a QTIP, you can ensure that your estate is handled exactly to your specifications, that your assets are secure, and that your spouse can enjoy regular income for as long as they live, without being liable for estate taxes. After your surviving spouse passes the beneficiaries of the trust are, instead, liable to pay the tax.
If you are looking to gain the maximum levels of legal tax savings, however, not to mention the utmost security, privacy and asset protection, you should give serious consideration to setting up an offshore trust. For more information talk to us about creating your own special Action Plan today.
QTIP Trusts – TL;DR
A qualified terminable interest property (QTIP) trust lets the settlor create a structure whereby their surviving spouse can enjoy regular income until they die.
Once the surviving spouse dies, the QTIP agreement then determines how the assets are dispersed to the trust’s beneficiaries.
In addition to providing trust income for surviving spouses, another key component of these types of trusts is that they are irrevocable. So any person looking to alter it will be unable to do so.
Depending on your financial situation, and indeed the nature of your family, you may decide it prudent to protect your property and assets in a QTIP. For example, if you have a second spouse, as well as children from a previous marriage, and want to ensure they are all taken care of when you’re gone.
Income generated from the trust assets and property can be used to provide regular payments to your spouse. Once your spouse dies, the assets pass along to your final beneficiaries (i.e. children) who will then be liable to pay estate tax.
QTIP Trusts – Overview
A QTIP Trust is a specialised type of trust used for the purposes of estate planning.
The term QTIP is an acronym for Qualified Terminable Interest Property trust.
As the settlor of a QTIP trust, you can retain control over your estate and determine how it is dispersed after you die. Your surviving spouse, meanwhile, can then receive income from this trust for the rest of their life, or for a set duration which you choose.
All of these stipulations can be outlined in the trust agreement before the fact, and, since a QTIP trust is an irrevocable trust – i.e. no changes can be made to the trust after it has been established – you can have the peace of mind of knowing that, no matter what, your loved ones will be taken care of after you’re gone.
First, you can plan how to look after the financial well-being of your spouse. Income generated from the QTIP will automatically pass along to your spouse upon your death and will remain as such until your spouse also passes, after which point your other beneficiaries (i.e. your children, grandchildren, etc.) can gain access to the trust assets.
In other words, with a QTIP trust, you can ensure that your spouse is taken care of for life and, later, your other family members can enjoy the financial benefits of the trust long after you’re gone.
QTIP Trust – Working Examples
To understand how a QTIP trust works, let’s take the example of Bill, a wealthy business owner and investor with two children, one daughter with his current wife and another son from a previous relationship.
Bill wants to ensure that, after he dies, his current wife is taken care of, so he sets up a QTIP which, firstly, will provide her with income for the rest of her life, after he’s gone.
Secondly, he wants to ensure that both his children are also taken care of, so this is also stipulated in the trust.
Alternatively, Bill may instead decide to set up the trust so that his assets go to his first spouse, and also ensure that, after his first spouse passes, the trust assets are also dispersed not only to his first spouse’s chosen beneficiaries but also his daughter from his second marriage.
In other words, QTIP trusts give you complete control of exactly who inherits your estate and when. Plus, since these are irrevocable trusts, they cannot be amended or contested afterwards, so you can have the peace of mind of knowing that your wishes will be respected and carried out regardless.
QTIP Trusts Versus Marital Trusts
Although both forms of trust are very similar, and ultimately used for the same purpose, there are a number of key differences between a regular marital trust versus a QTIP marital trust.
While both forms of trust are irrevocable, with a marital trust, the control of the trust is passed along to the surviving spouse.
With a QTIP trust, on the other hand, control does not pass to the spouse following the death of the settlor. This, in turn, means that, unlike in a standard marital type trust, the surviving spouse cannot name beneficiaries or otherwise control how assets in the trust are distributed.
The settlor of the trust also controls the amount paid out to the spouse, until the time of their death. At this point estate taxes are liable.
Advantages Of A QTIP Trust
One of the main advantages of a QTIP trust is the peace of mind that comes from knowing you are in complete control of what happens with your estate, even long after you die.
For your spouse, it also provides peace of mind in the form of a steady lifetime income. If the end goal is to continue to take care of your spouse after death, this is a solution well worth investigating.
While it’s true to say that many spouses may prefer to manage the funds directly (in which case a marital trust might be more suitable) this degree of financial autonomy is not for everyone.
Marriages are partnerships, after all, and in many cases, it’s common for one party to take the lead on financial planning. If this is the role you fill, and you’re certain that your spouse may be worried about how to handle the finances and paperwork after you’re gone, then a QTIP trust is the perfect solution.
It also helps negates things such as lengthy probate proceedings, which are often distressing in and of themselves but can be particularly traumatic for those who are struck by grief.
With a QTIP trust, you are able to take care of your spouse first and foremost, and then make sure that other beneficiaries (usually children, grandchildren, etc.) are taken care of also, once your spouse has passed.
For example, if your spouse has children from a previous marriage, but you want to ensure that your assets go to your children only (but without cutting your spouse out) then a QTIP, once again, is the answer.
And last, but certainly not least, are all the tax advantages that this type of trust provides. For example, by setting up a QTIP you can ensure exemptions from federal estate taxes on trust payments to your spouse until their death.
Of course, if you are concerned about estate tax, and taxes in general, eating into your assets and leaving less behind for your loved ones, then you should also give serious consideration to forming an offshore trust.
Offshore trusts can result in significant tax reduction ensuring your loved ones get the most from your assets, while also ensuring that you enjoy the best asset protection available.
To create a fully compliant offshore trust that still offers you the maximum tax benefits available, talk to us about creating your special holistic Action Plan today.
Disadvantages Of A QTIP Trust
It is fair to say that there are no real disadvantages to having QTIP per se, it’s all a matter of perspective.
So everything which is mentioned above in the advantages section could easily be viewed as a disadvantage, depending on what you’re looking for (with the exception of the tax advantages obviously.)
The fact that this type of trust is irrevocable, means it cannot be altered after it has been established, so there is very little wiggle room afterwards.
Secondly, the fact that your spouse still does not retain control over the trust assets once you have passed again represents an additional layer of inflexibility.
In other words, this type of trust may be very suitable in some circumstances and the completely wrong option for others.
For some, the level of granular control that such a trust offers is its primary selling point, though of course your spouse and/or your beneficiaries may see things differently and may prefer to have more financial autonomy.
It’s therefore important to think carefully about which type of trust suits your specific situation and try to have an open and frank discussion with your loved ones about what happens with your estate when you are gone.
How Does A QTIP Trust Work?
A QTIP trust works pretty much the same as every other type of trust, in that there is a settlor, the person who establishes the trust, the named beneficiaries, who gain eventual access to the assets in the trust (plus any property, etc. ) and the trustee, who manages the trust on your behalf.
A trustee can be a lawyer or estate attorney, it could be a financial institution, or perhaps a trustee company if you opt to set up your trust offshore. As settlor, you draw up the agreement, which is irrevocable, and then transfer assets into the trust.
A QTIP is a robust estate planning option since QTIPs protect property and assets and ensure that they only stay within your family circle (or chosen beneficiaries). They also provide income to your family members as and how you so wish.
As mentioned above, a QTIP is an irrevocable trust. This means that, once you have established the trust as per your trust agreement, and transferred your assets into the trust to be managed by the trustee, no further changes can be made.
This is a key point to remember when setting up this type of trust. On the one hand, it lacks flexibility, but on the other, it offers security and guarantees your estate is handled precisely in the way you want it, and that your loved ones can continue to be well taken care of long after you’re gone.
With a marital trust, the surviving spouse assumes control over the trust when the settlor of the trust dies.
So if you opt to set up this type of trust, your spouse will gain full access to the trust to do with as they please.
With a QTIP, on the other hand, this does not happen. The surviving spouse receives a payment from the trust but cannot administrate it. So if you set up a QTIP your estate plan will remain unchanged, even if, for example, your spouse remarries and perhaps even has more children, the trust funds cannot be diluted, only those individuals you have specifically added in the trust agreement will have access to those funds.
It’s also worth reiterating the tax advantages of such a trust, in particular the fact that the surviving spouse need not have to worry about paying taxes on the income they receive from the trust, those taxes don’t come into effect until after the surviving spouse passes on, in which case the tax burden falls on the eventual beneficiaries, and not the surviving spouse.
Protect Your Spouse And Beneficiaries
With a QTIP, you can maintain control of how your assets and property for long after you have passed, while still being able to provide income to your spouse to ensure they are well taken care of.
If you have children from a previous relationship and want to make sure they’re taken care of also after both you and your surviving spouse die, a QTIP is a worthy consideration.
Plus, although you may not be against the idea of your spouse remarrying after you die, you may have legitimate concerns that your wealth may make them the target for exploitation. A QTIP is the ideal form of trust since it makes certain that you “keep it in the family”, so your wealth goes to those who you have always intended.
Planning for your future and for your eventual death is no easy task, there are a lot of things to consider to ensure that your estate plan is executed in precisely the manner you want it and those (and only those) you want to take care of, will be, no matter what.
Of course, QTIPs are just one of many trust options you can employ for managing your estate and, considering how important this is, it’s worth taking the time to look at other options to ensure you’re making the right choice for you and your loved ones.
One advantageous option is to set up an offshore trust in a more tax-friendly jurisdiction, where you need not worry about estate tax, inheritance tax or capital gains. Setting up a trust in this way, done correctly, can result in significant tax savings while also providing far more bulletproof asset protection, so your loved ones are guaranteed to always get the maximum benefit of your wealth.
At Nomad Capitalist we help HNWI investors create complete, 360-degree offshore strategies encompassing everything from legal tax reduction to offshore banking, investing and trust formation.
Your family deserves the best, so talk to us about creating your complete Action Plan today.
Qualified Terminable Interest Property (QTIP) – FAQ
A QTIP is a type of irrevocable trust whereby the surviving spouse does not take over the trust once the settlor dies, but instead is paid a regular income until the day. In this way the living spouse does not need to pay estate tax, instead, following the death of the second spouse, the remaining assets are passed along to the final beneficiaries, along with the estate tax.