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Some QTIP Trust Advantages


Couples in their 2nd or 3rd marriages often consider a QTIP trust. This is because it works well to care for the current spouse for life. Then, it can be drafted to care for children from a prior marriage. A qualified terminable interest property (QTIP) trust is a type of marital deduction. It is codified in section 2056(b)(7) and 2523(f) of the Internal Revenue Code (IRC).

What makes a QTIP Trust a QTIP?

Under these provisions of the IRC, QTIP is any property transferred by a donor or decedent spouse in which a donee or surviving spouse has a “qualifying income interest for life” and which is subject to a QTIP election.

What does that mean?

The “Qualified’ part of QTIP means it qualifies for the spousal gift exclusion. The “Terminal” part means the spouse’s interest terminates at death. The effect and purpose of this is to provide for a surviving spouse without disinheriting children from a prior marriage. It is often used when there is significant difference in age between spouses, or when a surviving spouse may be vulnerable to financial exploitation.

A spouse has a qualifying income interest for life if the spouse is entitled to all of the income from the property. This is paid annually, at a minimum. No person has the power to appoint any property in the trust to any person other than to the spouse.

A lot of QTIP trusts make it so the trust distributes income quarterly or on a more frequent basis. However, mandating distributions like this is not required to qualify for the marital deduction. A QTIP trust need only direct the trustee to distribute income annually. More frequent distributions may be made under the terms of the trust.

What about Asset Protection in a QTIP Trust?

To improve asset protection under the terms of the trust, estate planners give discretion to a disinterested or independent trustee.

In this way, the trustee may make more frequent distributions but can hold back if the spouse has issues. Issues like being sued, bankruptcy, failing business, etc.

In addition to a provision for at least annual distributions, there should be a fixed date for the mandatory distribution of income.

Another aspect of asset protection to consider is making the QTIP income “for the benefit of the spouse”. Rather than making a direct distribution to the spouse, give the trustee the flexibility to apply the income for the benefit of the spouse. This allows the trustee to make the call. It also enhances asset protection when creditors are at the door.

In most states, trust law allows a Donor’s creditors to reach the Donor’s interest in the QTIP trust. For example, if the Donor sets up a trust for his own benefit (a Self-Settled Trust). Some states have passed laws allowing Self-Settled Trusts. Arizona reversed the application of the self-settled trust doctrine where the Grantor of an inter vivos QTIP trust retains a secondary life estate.

Questions to ask are:

  1. Does the Donor have a secondary life interest in an inter vivos QTIP trust? If so, they need a trust in a state that has reversed the self-settled trust doctrine.

  2. Did the Donor retain a mandatory income interest in the trust? If so, they need special care in drafting the trust.

There are lots of considerations when it comes to QTIP trusts. If you have an interest in learning more about QTIP trusts or think you want to create one for your family situation, please call us at Durfee Law Group 480.324.8000. We can help.

Live Well, Leave a Legacy.

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