Shawna Murray Law


Estate Planning Blog

5 Reasons Why You Need a QTIP Trust

The Tax Cuts and Jobs Act passed at the end of 2017 virtually eliminated estate taxes by making nearly all Americans exempt. This is because the new law increased the exemption levels to over $10 million dollars per person. It is estimated that over 99.8% of Americans will not have to pay estate taxes at the current exemption limits. Yet, many different types of trusts have been created over the years to avoid estate taxes. Now that estate tax avoidance is no longer an issue, we do not have to discontinue using those trusts. We can still use them to provide many other benefits beyond estate tax planning.

When the tax exemption amounts were significantly lower, many married couples planned their estate using trusts that allowed them to avoid paying as much of the estate taxes as possible. A very popular trust was the “QTIP” Trust (a.k.a. Qualified Terminable Interest Property trust). This trust was originally for estate tax planning when, not so long ago, exemption amounts were only a small fraction of what they are today.

What is a QTIP Trust?

The QTIP Trust allows a married couple to set aside some or all of the deceased spouse's property to be held in a QTIP Trust during the lifetime of the surviving spouse. The surviving spouse is not given access to the principal in the trust, only the interest or income produced. In California, “all” of the decedent's property is one-half of their community property and all of that person's separate property.

The surviving spouse can have the right to all of the income produced by the principal, or in the case of a house, to live in it during the surviving spouse's remaining lifetime. If the couple does not want to give the surviving spouse access all of the income in the QTIP, then the surviving spouse can be limited to getting funds only for their health, education, maintenance, and security. Another option is to provide the surviving spouse with access not only to income but also to the principal, using an independent trustee to control just how much can be given to the survivor.

You may be asking, “why on earth would I want to limit my surviving spouse's access to my money after my death if I really do not have to do this for tax planning purposes?” Or you may be wondering, “why wouldn't I just let my beloved, trustworthy surviving spouse make all of the decisions about all of the money after I am gone?”

Certainly, those are two possible options but, if you are aware of the other benefits of a QTIP trust, you may decide that a QTIP is an excellent option for your family's situation.

Protection for Your Heirs

If you and/or your current spouse have children from previous relationships (or even just one of you has kids), a QTIP will help ensure that they get an inheritance. Blended families are difficult to maintain after one of the spouse's passes away. If you go first and allow your surviving spouse to take control of all of your assets, it is entirely possible that the children from your previous relationship never see a dime. A QTIP trust can ensure that your children get an inheritance.

Second Marriage of Surviving Spouse

This can also be called the “gold-digger” protection. In the event that your surviving spouse remarries, a QTIP will keep the funds that you left to your survivor segregated from the new relationship. It will prevent the new spouse from being able to access the principal, preserving it for your heirs or beneficiaries.

Elder Abuse and Scam Protection

It is sad how vulnerable we and in particular, our elderly population, are to the crooks out there. Sometimes the scam is an expensive lesson learned but other times the victim is wiped out entirely and left destitute. The QTIP trust funds can protect your principal from the scammers and help your surviving spouse if they get preyed upon.

Creditor Protection

If you restrict your surviving spouse's ability to access the principal funds in your QTIP, those funds can be off limits to your spouse's creditors. Even if your spouse always sticks to a strict budget and lives within their means, sometimes accidents happen. If your spouse causes an accident or otherwise gets sued, your principal can be protected as long as you have an independent trustee controlling those funds.

Tax Planning

While only the wealthiest of the “one percent” are currently subject to paying federal estate taxes, that is not necessarily always going to be the case. As a matter of fact, the current high exemption amounts return to 2016 rates in just seven years. In that same time, your own wealth will have increased and your surviving spouse might be thankful that the two of you decided to prepare yourselves with the QTIP trust.

Ready to Talk?

As you can see, there are so many variables at play which can cost your estate dearly when no planning is done. Without planning, you have no control over your own legacy. Whether you would like to make a QTIP Trust a part of your estate planning will also depend on many factors but at least you are now aware of some of the benefits besides tax planning. I highly recommend that you discuss it with your spouse before you arrive at the attorney's office. However, if you would like to start a conversation about the various estate planning options, just text or call me.