New York Estate Planning & Elder Law Blog
QTIP TRUSTS – WHAT IS IT?
In our society, with divorces as common as it is, many people would likely benefit from a qualified terminable interest property (QTIP) trust. The QTIP trust gives a stream of income produced from a trust to a surviving spouse. That money passes without payment of any estate tax, as the spouse enjoys the unlimited marital deduction for estate taxes. The surviving spouse does not obtain title to the income producing property or control over it. The QTIP trust documents control where it goes after the surviving spouse passes away. It allows for the interim benefit of the surviving spouse, while preserving the income producing property. After the surviving spouse passes, the property goes to the heirs as designated by the QTIP trust.
ELEMENTS OF A QTIP TRUST
Under the United State Code, there are several elements that a QTIP trust must address before it can benefit from the such preferential status under the tax code. They are:
- The surviving spouse has a right to all income generated by the property contained within the trust (the corpus of the trust), which must be paid at least annually, but can be paid more often;
- The assets covered by the trust cannot be sold, distributed or otherwise disposed of during the surviving spouse’s lifetime, although the deceased spouse can grant the the executor the authority to withdrawal five thousand dollars or five percent of the principal in any calendar year;
- To insure the legal sustainability of the unlimited estate tax marital deduction, the surviving spouse is the sole lifetime beneficiary of the trust;
- The executor of the estate must affirmatively designate the property as QTIP property. Such designation is made only one time and it is irrevocable.
WHY OBTAIN A QTIP TRUST
There are several reasons why a person would utilize a QTIP trust. It is often used when a person wants to insure that they leave regular income for their current spouse but also that the income producing property goes to their kids, perhaps from a former marriage. The surviving spouse cannot, for example, pass it on to their kids from a former marriage or a future spouse. If the asset is left to the then current spouse at the time of passing away, depending on the jurisdiction, there may be little the heirs can do to insure that it is preserved for them. In addition, with a QTIP, it allows the option of the executor to decide the wisdom of transferring certain property to the QTIP corpus and thus get the benefit of the marital deduction or forego the deduction. Creating a QTIP trust for this reason is a recognition that tax laws do change. New York changed its estate tax laws in 2014. The deceased spouse must allow the executor the authority to create and fund the corpus of the trust of the executor is to maximize tax savings. Finally, since the assets in the QTIP trust are included in the surviving spouse’s estate, there is a stepped up basis, which, once disposed of by the heir allows for a more favorable tax treatment.