How Can a QTIP help your Estate Plan?

How Can a QTIP help your Estate Plan?

qtipYou probably came to this post thinking how I was going to tell you how the amazing little cotton swab is going to save your estate plan.  However, that’s more reasonable then thinking that this is a post about how he Rapper named Q-TIP is going to save your Estate Plan (don’t remember him? Anyone under 30 should remember the song, Vivrant Thing; anyone under the age of 40ish might remember him from the group, A Tribe Called Quest).   It should be obvious that neither of those things would be anything I would write about.

Notwithstanding cotton and rappers, this post is going to focus on Qualified Terminable Interest Property Trusts. I will try not to make it too dry I promise.

What is a Qualified Terminable Interest Property Trust?

A QTIP Trust is either created during the life of the Grantor (known as an inter vivos QTIP) or it can be created at death (Testamentary QTIP). It is usually created at deal where the rules basically come down to,

  • All Income to my Surviving Spouse; and
  • Upon his or her Death the remainder to my children

But, My Journey, isn’t this the same thing as a Simple Will? To put it plain and simple, No.  To understand what a QTIP Trust is…you must first understand where it came from, and why it came into existence.

Unlimited Martial Deduction

Under the current Federal Estate Tax Law a U.S. Citizen Decedent can leave a U.S. Citizen Surviving Spouse an unlimited amount without incurring any estate taxes.  So in the most extreme situation, Bill Gates can Leave Malinda Gates his $50Billion without incurring any federal estate tax, but, when Malinda dies the IRS will be there with their hand out waiting for The Federal Government’s share of Estate Taxes. To take advantage of the UMD you have to meet certain requirements:

  1. Receipent must be Decedent’s Surviving Spouse
  2. Surviving Spouse must be a U.S. Citizen
  3. Property must be included in Decedent Spouse’s Gross Estate
  4. Property must actually pass to the surviving spouse
  5. Interest passing can’t have restrictions such as terms of years or subject to conditions like not remarrying

So what was happening? We had Congressmen who were getting remarried, to second wives they wanted the UMD but didn’t want to leave assets directly…so the QTIP was invented!

Qualified Terminable Interest Property (QTIP) Requirements

So instead of giving all the assets outright to the surviving spouse we are going to put in a Trust with the following rules:

  1. All income to Surviving Spouse
  2. No one has the power to appoint any part of the property to any person other than the surviving spouse during the lifetime of the surviving spouse and
  3. Decedent’s spouse executor makes the QTIP election on the federal estate tax return of the decedent spouse.

If there is no income the surviving spouse can force income, also the QTIP can give power to surviving spouse to appoint principal after he or she dies, but most don’t.

  1. N one has the power to

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