Estate planning for couples with disproportionate assets who are married for the second or third time can be tricky. One solution—the Lifetime QTIP Trust—allows the well-to-do spouse to maintain control of their property and wealth, but also protect and provide for the other spouse.
Creating a Lifetime QTIP Trust
A “QTIP Trust” (qualified terminable interest trust) is a type of trust that allows a wealthier spouse to transfer an unrestricted amount of assets into a trust for the benefit of their less wealthy spouse. This can be done free of estate and gift taxes.
High net worth couples can make use of a QTIP Trust after the first death using the “AB Trust” structure: After the first spouse dies, the “B Trust” holds an amount equal to the federal estate tax exemption (currently $11.58 million in 2020). The “A Trust” holds the excess. The “A Trust” is, in fact, a “QTIP Trust”, which qualifies for the unlimited marital deduction. This means property passing into the trust will not be subject to estate taxes until the surviving spouse dies.
But what if the wealthy spouse creates and funds the QTIP Trust for their spouse’s benefit with tax-free gifts while the wealthy spouse is alive, instead of waiting until after his or her death? This is the “Lifetime QTIP Trust. This trust must meet the following criteria to qualify for the unlimited marital deduction:
- The trust must be irrevocable.
- The less wealthy spouse must be a U.S. citizen.
- The less wealthy spouse must be entitled to receive all the net income from the trust at least annually.
- The less wealthy spouse must have the right to demand that any non-income producing property be converted into income-producing property.
- The less wealthy spouse must be the only one with the power to appoint trust property.
- A federal gift tax return must be filed before the deadline.
A Lifetime QTIP Trust Offers Many Benefits
Outright gifts to your spouse during life or after death lead to a total loss of control. If you and your spouse have families from prior marriages and lopsided estates, the loss of control is exacerbated by the difference in your wealth. If the less wealthy spouse dies first, the well-to-do-spouse will be fine, but the opposite is not true. If this describes your situation, a Lifetime QTIP Trust offers the following benefits:
- The wealthy spouse can create and fund a Lifetime QTIP Trust without using any gift tax exemption.
- The generation-skipping transfer tax exemption is not portable, so a Lifetime QTIP Trust can leverage the less wealthy spouse’s exemption, reducing overall taxes.
- During the less wealthy spouse’s lifetime, he or she will receive all the trust income and may extract trust principal for limited purposes.
- When the less wealthy spouse dies, the assets remaining in the trust will be included in his or her estate. This makes use of the less wealthy spouse’s otherwise unused federal estate tax exemption.
- If the less wealthy spouse dies first, the remaining trust property can stay in an asset-protected, lifetime trust for the wealthy spouse’s benefit (subject to applicable state law). The remainder will be excluded from the wealthy spouse’s estate when he or she dies.
- After both spouses die, the balance of the trust can be passed to the wealthy spouse’s chosen beneficiaries.
Could You Benefit from a Lifetime QTIP Trust?
Lifetime QTIP Trusts are not “one size fits all” and are specifically tailored to each couple’s goals, family dynamics, and financial situation. Contact our team if you think you and your spouse fit the Lifetime QTIP Trust profile. We’ll meet with you to determine the best solution for your family.