Creating a successful estate plan often requires you to make use of a wide range of inter-related estate planning tools and documents. Moreover, as your estate and your family grow, your estate plan will likely need to grow as well. If you divorce and remarry, for example, you may now need to protect both your new spouse and your children from your previous marriage. One popular way to do that is to make use of a specialized type of trust known as a Qualified Terminable Interest Property, or QTIP, trust. If you are considering the use of a QTIP in your estate plan you will need to gain a better understanding of the QTIP trust requirements.
How Does a Simple Trust Work?
Trusts have evolved to the point where there is a specialized trust to fit almost any estate planning need; however, the basic concept of a trust remains the same. A trust allows you (the “Grantor” or “Settlor”) to designate assets that will be managed by a person or entity (the “Trustee”) for the benefit of a third party (the “Beneficiary”). Trusts are broadly divided into two categories – testamentary and living trust. A testamentary trust does not activate until triggered by a provision in the Grantor’s Will at the time of death while a living trust activates when all formalities of creation are complete.
Who Benefits from a QTIP Trust?
Given the unique nature of estate planning, only your estate planning attorney can tell you with certainty if a QTIP is right for your estate plan; however, understanding who typically benefits from the inclusion of a QTIP trust may be beneficial to learn. For example, a QTIP trust often works well for a Settlor who is part of a blended family. In the U.S., about half of all first marriages end in divorce and about half of those people go on to become part of a blended family at some point. If you are part of a blended family, you already understand the challenges that come with combining two families into one. A blended family can create estate planning challenges as well, starting with the seemingly disparate goals of providing for your current spouse in your estate plan while still protecting assets that are intended for your children from a previous marriage. If you find yourself facing just such a dilemma, you may benefit from the inclusion of a QTIP trust into your estate plan.
The Spousal Dilemma
During your first marriage, your plan was likely to leave all your assets to your spouse. Your spouse then created a reciprocal estate plan. The understanding between the two of you was that the last one to go would then pass those assets on down to your children. Once divorced though, that plan no longer works. You could leave everything to your new spouse and hope the assets get passed down to your children upon death. That would require you to have absolute faith that your spouse would follow your wishes and not deplete the assets because once you are gone, your spouse will have complete control over those assets with no legal constraints on their use. Your children could wind up with nothing. A QTIP trust prevents that possibility while still providing for your spouse.
QTIP Trust Requirements and How It Can Help
A QTIP trust operates in basically the same way as any other trust with some special terms designed to provide for your spouse while protecting your children’s inheritance. You will need to appoint a Trustee to oversee the administration of the trust and to manage the trust assets. Assets transferred into the QTIP trust are not actually gifted to your current spouse when you die. Instead, your spouse receives income from the trust assets but cannot withdraw the principal from the trust nor can he or she decide on the ultimate disposition of the trust assets. In the case of real property, your surviving spouse may also receive a “life estate” in the property, meaning that he or she may remain in the home until death, but will never own the property outright. When your surviving spouse dies all assets held in the trust are then transferred to the intended QTIP trust beneficiaries, typically your children from a previous marriage.
Contact California Trust Lawyers
Please download our FREE estate planning checklist. If you have additional questions about QTIP trust requirements, contact the Northern California Center for Estate Planning & Elder Law today by calling (916)-437-3500 or by filling out our online contact form.
- Estate Planning and Charitable Giving — Key Points - March 29, 2020
- Over-Funding Your Retirement Plan: A Potential Estate Planning Problem - March 27, 2020
- Best Places to Retire: State Taxation - March 25, 2020