As families change, so do estate planning tools. One type of trust that has become increasingly common as more people enter into second or third marriages is the qualified terminable interest property (QTIP) trust.
It helps people ensure that their surviving spouse is cared for financially after they die and also helps protect assets for their children from previous marriages. This can prevent some of the nasty, high-profile court battles we’ve seen between stepparents and adult stepchildren after a parent dies.
A QTIP trust also has tax advantages for those who inherit assets significant enough to be taxed. However, even if your estate doesn’t reach that level, it a QTIP trust may still be worth considering as an alternative to a traditional marital trust.
How does a QTIP trust work?
The grantor (the person who establishes the trust) typically directs assets like investment or rental property, investment accounts and stocks to be transferred to the trust upon their death. Their surviving spouse, who’s designated a lifetime beneficiary, gets that income. However, they have no direct access to the assets in the trust. A grantor can designate an amount or percentage of income for their spouse to get each year.
Those assets are managed by a trustee. Choosing the right trustee (and successor trustees) is essential to make sure that the trust is managed so that it continues to generate income and the assets are protected. Typically, a surviving spouse gets all the income generated by the trust. It’s also possible to set up the trust so that they can take a limited amount of the principal annually.
The trust assets are excluded for tax purposes from the estate as long as the surviving spouse is alive. When the surviving spouse dies, the remainder of the assets is distributed to the named “remainder beneficiaries” (such as adult children) as designated by the grantor.
Of course, this doesn’t mean that your children have to wait until their stepparent dies to inherit anything. You can leave them other assets directly in your will or through other estate planning tools. It’s best to explore all of your estate planning options to determine what will best allow you to provide for your family and protect everything you’ve worked so hard for after you’re gone.
