Qualified terminable interest trusts (QTIP trusts) are an estate planning tool used to maximize a couple's applicable exclusion amounts while qualifying for the marital deduction. Full property interest transfers to spouses do not trigger most gift or estate taxes under the marital deduction.
All MAPTs are irrevocable trusts, so once any assets are placed in the trust, the grantor loses control of the assets. Do not transfer assets into a MAPT without a long-term plan for the assets and their eventual transfer to other family members. A MAPT is not the only way to protect the family home from Medicaid.
The person who sets up the QTIP - also known as the Grantor - can make sure the surviving spouse has the resources they need to live. Under this type of Trust, income made on the QTIP will automatically pass to the remaining spouse.
Credit shelter trusts, including QTIP and marital gift trusts, can be a useful tool in preserving an estate's assets. Determining which option is best in a given situation depends on the amount of control desired by the original donor and the income needs of the surviving spouse.
A QTIP trust defers estate taxes until the death of the surviving spouse, as the trust's assets are included in their estate.
Example of a Credit Shelter Trust
After the husband dies, his $6 million estate and any income it generated passes free of estate tax to his wife because it falls below the federal exemption. However, the transfer boosts the wife's net income to $12 million and past the estate tax exemption.
What Are the Potential Drawbacks of a QTIP Trust? Limited Access: The surviving spouse generally receives income generated but might have restricted access to the trust's principal, which could be limiting in case of financial difficulties.
A: "Grantor trust" is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust's income or assets.
Example: Jim sets up a QTIP trust, naming his wife Janice as the life beneficiary and his sons from a previous marriage as the final beneficiaries. Jim dies first, leaving Janice a life estate in the assets that are left to the QTIP trust, their house and some investment accounts.
Once your home is in the trust, it's no longer considered part of your personal assets, thereby protecting it from being used to pay for nursing home care. However, this must be done in compliance with Medicaid's look-back period, typically 5 years before applying for Medicaid benefits.
Once assets are placed in an irrevocable trust, you no longer have control over them, and they won't be included in your Medicaid eligibility determination after five years. It's important to plan well in advance, as the 5-year look-back rule still applies.
Income must be distributed to the surviving spouse to qualify for the most common type of QTIP trust, and, sometimes principal is drafted to be distributed to the surviving spouse to ensure that the spouse receives the needed lifetime liquidity.
Instead of using each other's estate tax exemptions as in a Lifetime QTIP Trust, a Lifetime SLAT uses each spouse's own exemptions. In this case, a spouse would make a gift to a SLAT in order to lower his or her taxable estate.
Unlike a grantor trust, where the grantor is considered the owner of the trust property for tax purposes, a non-grantor trust is a separate legal and taxable entity. It has its own tax identification number (TIN) and files its own income tax return.
Any trust that is not a grantor trust is considered a non-grantor trust. In this case, the person who set up the trust has no rights, interests, or powers over trust assets. Because they are taxed as a separate entity, non-grantor trusts are required to have their own TIN.
In a grantor trust, the trust creator retains certain powers over the trust, including rights to the trust's assets and income. Trust assets may be included in the trust creator's estate when they pass away. With a non-grantor trust, the trust creator has no interest or control over trust assets.
Trusts in general are a useful legal instrument to avoid probate when the grantor of the trust passes on. A marital trust, as well as a QTIP trust, also provides the additional benefit of protecting more assets from federal estate taxes.
The QTIP trust is a type of irrevocable trust that is most commonly used by individuals who have children from more than one marriage. The surviving spouse receives an income for life from the trust but the grantor directs how the remainder of the trust will be distributed after the surviving spouse's death.
This means your surviving spouse cannot directly allocate the trust's income or principal across multiple generations. Potential Income Tax Liability: In federal income tax terms, a QTIP trust is considered a “simple trust” because it must make all income distributions at least annually.
Unlike a QTIP trust, the assets of the credit shelter trust are not included in the beneficiary's gross estate and, as a result, are not subject to estate tax at the beneficiary's death (in other words, the assets bypass the beneficiary's estate).
The QTIP trust serves like a “crystal ball” for the uncertainty of the future in marital trust planning. Not only does it provide for your surviving spouse and other loved ones after your death, but it also offers flexibility to your executor in maximizing your federal estate tax savings.
If you fail to fund the Bypass trust or do so late, the IRS may assess penalties, taxes, and interest.