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QTIP Trusts - Not Used for Cleaning Ears

A QTIP Trust may sound like piece of cotton, but in reality it stands for a "Qualified Terminable Interest Property" trust. If you die first but want to determine who receives the trust property after your spouse dies, consider using a QTIP Trust. A QTIP trust operates much the same as a marital deduction trust, with one important exception: You, not your spouse, specify who receives the remaining property in the trust after your spouse dies. [Because a QTIP trust makes use of the estate tax marital deduction, it is not useful for people who are not married.]

Scenario #1:

You and your spouse were only married once (to each other). You have a happy, loving marriage. Your children act like they stepped out Leave It to Beaver. You both want the other provided for no matter who dies first and want to set up some type of trust to delay or diminish federal estate taxes. You both agree that after the second spouse dies, the remainder of the trust will go to your children. In addition, you both agree that the surviving spouse can change the amount each beneficiary will receive in his or her estate plan. In this scenario, a marital deduction trust (much less restrictive than a QTIP Trust) will work well.

Scenario #2:

You and your current spouse are each on your second marriage, and you each have children from your first marriage. You and your step-children don’t get along harmoniously. You view them as "freeloaders," while your spouse sees them as "angels".

You and your spouse have a happy marriage, and you want to provide for your spouse if you die first. However, you do not want your spouse to decide what happens with any leftovers from your estate upon his or her death, as would be the case in a marital deduction trust.

A QTIP trust enables you to designate what happens to leftovers. During your surviving spouse's lifetime, he or she will receive payments from the trust based on the income the trust is generating, similar to the issuance of stock dividends. Since the surviving spouse is never the true owner of the trust property, a lien cannot be put against the property within the trust or the trust itself. Payments will be made to your surviving spouse for the rest of their life. Upon their death, the payments cease, as they are not transferable to another person. The assets in the trust then become the property of the listed beneficiaries.

The property within the QTIP providing funds to a surviving spouse qualifies for marital deductions, meaning the value of the trust is not taxable after the first spouse’s death. Instead, the property becomes taxable after the second spouse's death, with liability transferring to the named beneficiaries of the assets within the trust.

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