A trust with a QTIP provision or rather a Qualified Terminable Interest Property (Q.T.I.P.) has two main purposes in planning one’s estate. One purpose is the availability to avoid unnecessary tax payments upon the death of one spouse. A second purpose is to ensure that specific beneficiaries will not be cut out of the trust in the future.
What the QTIP allows the testator to do is provide their surviving spouse with a life estate, while then passing the property on to a designated beneficiary at a future time. This allows for full enjoyment of the property without ownership.
Under State and Federal law, estates pass on to their beneficiary(ies) tax free, so long as the value of the estate which is passed on is under a certain dollar threshold. This amount varies by state and varies year-to-year federally. Properly used, the QTIP will lessen the value of the estate which is passed on to the surviving spouse, keeping it below the threshold which would trigger a potentially massive tax penalty which may then require the selling of assets by the beneficiaries in order to pay the tax. By providing a life estate without ownership rights, the surviving spouse will still be allowed to live in the family home, collect all interest and dividends from investments, and enjoy the fruits of the lifetime of work and planning without claiming the property or principle asset, as part of the value of the estate.
It is not uncommon in a marriage that one or both couples may have children from a previous marriage. One of the complications which can arise is how to divide the marital assets upon the death of the birth parent without doing harm to either the surviving spouse, children had between the two spouses, or other beneficiaries. Under the normal trust situation, when one spouse dies all assets are then given to the surviving spouse who would then have control over who would be the beneficiary in the future. Beneficiary designations can change at any time, added or removed. If the testator wants to ensure that certain beneficiaries were to remain as such, they would need to pass that property on immediately upon their death, thereby not allowing their spouse to utilize the property during the rest of their lifetime.
A QTIP provision can help to solve that problem by allowing the testator to provide a life estate to their surviving spouse. Because the surviving can still remain in the family home, and still benefit from the dividends and interest from investment property, the surviving spouse is not impacted by the QTIP. The testator can then designate to whom the property will revert upon the death of the surviving spouse. Because the surviving spouse has a life estate, the surviving spouse is not allowed to sell, transfer, gift, or in any way dispose of the property because the property is still owned by the trust. This will ensure that the surviving spouse is not harmed because of a lack of property being left to them, and that beneficiaries will inherit the property as it was intended.
Utilizing the QTIP provision as a way to avoid (not evade) unnecessary tax payments on a large estate helps to eliminate double taxation of assets and the potential need to sell assets in order to pay a tax bill which was either not expected or larger than expected. It can also help to ensure that beneficiaries are not eliminated or removed upon the death of the testator.
