A recent United States Tax Court opinion in ESTATE OF MARTIN W. GRIFFIN v. COMMISSIONER, Docket No. 15938-23, discussed QTIP Trusts and sparked the idea for this Article. QTIP Trusts, also known as Qualified Terminable Interest Property trusts, are an important and useful estate planning tool for married couples.
What Is a QTIP Trust?
When planning for the future, one of the most important goals for many married couples is to ensure that their assets are managed and distributed according to their wishes—especially in blended family situations or when providing for a surviving spouse while preserving inheritance for children.
A QTIP trust allows a grantor (typically the person setting up the trust) to provide income for their surviving spouse while retaining control over how the trust’s principal (or the assets within the trust) is distributed after the grantor’s death. This type of trust is particularly useful in second marriages, where the grantor may want to support their current spouse but ultimately leave assets to children from a previous marriage.
Estate Tax and Marital Deduction
Federal estate taxes can take a significant portion of a person’s estate upon death, depending on the size of the taxable estate. The estate tax can rise up to 40%, therefore clients and their advisors must be aware of this tax.
However, the IRS allows for an unlimited marital deduction, which means that any assets left to a surviving spouse are not subject to estate tax at the first spouse’s death. As stated in of ESTATE OF MARTIN W. GRIFFIN v. COMMISSIONER, the value of property passing from the decedent to his or her surviving spouse is generally deductible. The tax is deferred until the surviving spouse passes away.
How It Works
The beauty of the QTIP Trust is that a QTIP trust qualifies for the marital deduction, even though the grantor restricts the ultimate distribution of the assets. This makes the QTIP trust a powerful tool for deferring estate taxes while ensuring the grantor retains control over the estate’s final disposition.
Upon the grantor’s death, the QTIP trust provides all income from the trust to the surviving spouse for life. For a trust to qualify as QTIP Trust, the following requirements must be met: (1) the property must pass from the decedent, (2) the surviving spouse must have a qualifying income interest in the property for life, and (3) the executor of the estate of the first spouse to die must make an affirmative election to designate the property as QTIP. See § 2056(b)(7)(B). When the surviving spouse passes away, the remaining assets are distributed according to the original terms of the trust—typically to children or other chosen beneficiaries.
Benefits of a QTIP Trust
- Income for the surviving spouse: Ensures financial security for a surviving spouse without giving them full control over the trust principal.
- Control over final distribution: Guarantees that remaining assets pass to designated heirs.
- Estate tax efficiency: Defers estate taxes and may reduce the overall tax burden.
- Ideal for blended families: Helps balance the needs of a current spouse with the desire to leave assets to children from a prior marriage.
Is a QTIP Trust Right for You?
Every family is different, and estate planning should reflect your unique goals and relationships. A QTIP trust can be an effective solution for preserving family harmony and ensuring your legacy is distributed exactly as you intend.
To learn more about how a QTIP trust might fit into your estate plan, contact our office for a personalized consultation. If you would like to schedule a meeting to review your estate plan, or if you have any questions, please call the attorneys of Wakefield Law, PC at (248) 457-9860.
This article is meant for informational purposes only. Please recognize that nothing in this article constitutes legal advice. If you have any questions, comments, or seek legal assistance, please contact one of the attorneys at Wakefield Law, P.C.