QTIP Trust Advantages: 7 Surprising Benefits

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Paul Sundin, CPA

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A QTIP trust can work wonders in the right situation. In this post, we will address the QTIP trust advantages and examine the best way to set on up.

#1 – Executor Flexibility

The executor can choose the estate tax treatment of the QTIP to note any changes in the tax laws or changes in asset value since you last finalized your will. It can work best when the surviving spouse already owns significant assets. In that situation, the executor can utilize the graduated tax brackets in the estate law for you both. As such, it will reduce the overall tax paid between the spouses.

#2 – First Spouse Who Passes Controls Disposition

QTIP trusts are unlike other forms of marital deduction transfer. They allow the first spouse to die to control the final disposition of their property subsequent to the death of the surviving spouse.

QTIP trusts work great in this situation. This is especially true when the spouses were previously married and have children from prior marriages.

#3 – Excluded in Probate Estate

Here we have an excellent advantage for the surviving spouse. Any assets remaining in the QTIP when the surviving spouse passes away will not be either:

  • included in the surviving spouse’s probate estate or included in probate proceedings.
  • protected from the claims of the surviving spouse’s creditors.

#4 – QTIP Election Decisions

The marital deduction’s availability and the resulting property’s inclusion in the QTIP trust is contingent upon the executor making a QTIP election when the first spouse dies.

In many cases situations, it may be more advantageous to decline to make the QTIP election. In other cases, creating a partial QTIP election, which is permissible, may be more helpful.

Fortunately, a QTIP allows the executor of the first spouse to make specific decisions when the first spouse passes away.

#5 – Opportunity for Reverse QTIP Election

Another significant advantage is the opportunity to make a reverse QTIP election.

What is a reverse QTIP election? It permits the executor of the first spouse to pass away to elect that the QTIP will continue to be treated (for GST purposes) as property transferred by the first spouse. Even though the trust assets are otherwise treated as belonging to the surviving spouse for gift and estate tax purposes, this is the case.

Typically, a reverse QTIP election is made to allow the first spouse to die to utilize a portion of the GST exemption that otherwise might not be used. A reverse QTIP election is only necessary when the amount of the GST exemption exceeds the applicable exclusion amount. 

#6 – Second Marriages

A second marriage (or even a third and fourth) can complicate estate planning. When there are children from different marriages it makes it challenging to allocate assets between the different children.

But a QTIP can make asset allocations between children a little eaiser. It accomplishes a couple things:

  • It gives your spouse comfort that they will have income upon your death. The spouse receives income from the trust and when they pass away, the assets are passed on to the remaining children.
  • Your children get peace of mind knowing they will get the assets once your surviving spouse passes away. It eliminates any concerns about the children of your spouse receiving the assets. 

QTIP trust aren’t for everyone. But in many situations, they are a great fit. This is especially true if you have children from a prior marriage. 

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Estate CPA

Gilbert, AZ