QTIP TRUST

WHAT IS A QTIP TRUST?

With this type a trust an Estate Planning attorney drafts a Trust Agreement that provides for the division of the trust into sub-trusts after the death of the first spouse. It is very detailed because it contains many tax planning provisions.

With a QTIP Trust, your trust potentially divides into three separate sub-trusts after the first death. The survivor’s portion of the trust passes to the survivor’s revocable part of the trust estate (called the “Survivor’s Trust”). The deceased spouse’s portion of the trust initially goes into an irrevocable trust called the “Marital Deduction Trust”; from there the surviving spouse can choose (“elect”) to have that portion of the deceased spouse’s estate up to the maximum amount which can pass free of the federal estate tax exemption available in the year of the deceased spouse’s death (which is currently $5,490,000) distributed to an irrevocable trust called the “Decedent’s Trust”. In this situation, there will be no federal estate tax due regardless of the value of the trust and the tax laws in the year of death (this is called the “unlimited marital deduction”).

At the death of the survivor, the assets held in the Decedent’s Trust pass to the beneficiaries of your trust without federal tax and the assets in the Survivor’s and the Marital Deduction Trust are taxed only to the extent the total value in those trusts exceeds the estate tax exclusion available for the year of the surviving spouse’s death.

By utilizing these divisions, you are able to protect the decedent spouse’s assets from any future creditors, lawsuits or governmental “spend-down” requirements and use the estate tax exclusion amount at both deaths and thereby at least double the amount which can pass tax free to your beneficiaries; plus the assets in the Marital Deduction Trust will receive an additional “basis step-up” at the second death which will eliminate potential capital gains tax for those assets sold by your beneficiaries.

Also, it can require the Trustee to pay all of the income from the Survivor’s Trust and the Marital Deduction Trusts to the surviving spouse plus giving the Trustee(usually the surviving spouse) the discretion to pay the income of the Decedent’s Trust to either the survivor or to your children (this can provide for asset protection, as well as, potential income tax benefits). In addition, because IRA rules can apply and can have different requirements, there should be language to make sure that these conflicting tax laws do not result in any adverse income or estate tax consequences.

Also, it gives the Trustee the power to use the principal of the sub-trusts for the benefit of the survivor. This is an unlimited power utilizing any criteria for the Survivor’s Trust; however, unless there is “non-Interested Trustee” (i.e., an “independent third-party Trustee”) acting for asset protection purposes, the distribution of principal from the Decedent’s Trust and the Marital Deduction Trusts must be discretionary and must be limited to the survivor’s “proper health, support and maintenance” in order to maintain the same standard to which the survivor was accustomed at the time of the first death. This limitation is necessary to prevent the assets in the Decedent’s Trust from being taxable as part of the survivor’s estate or from being reached by the surviving spouse’s creditors. Finally, it gives the Trustee the discretionary power to use the principal of the Decedent’s Trust for your children, particularly while they are not yet twenty-one.

This will be discussed during our meeting depending on your circumstances

Codi M. Dada Law Offices

802 Grant Avenue, Novato, CA 94945-3218
415-827-1425

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