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QTIP Trusts
Qualified Terminable Interest Trusts (QTIP
or A-B-C Trust)
A Qualified Terminable Interest Trust
Qualified Terminable Interest Trust
Requirements
The Point is Control, not the Estate
Tax
In Summary
Qualified Terminable Interest Trusts (QTIP or A-B-C
Trust)
It used to be that the only way a married person could avoid
the estate tax was to
leave all of his or her assets that exceeded the amount of the
estate tax exemption to the surviving spouse. This all changed
over twenty-five years ago, in 1981. Transfers between spouses
are now exempt from the estate tax as long as the surviving
spouse is a citizen of the United States.
This restriction doesn't hold for the surviving spouse, however,
who can leave the assets to anyone. Suppose there is a married
couple, John and Ann Smith, and John has $2,000,000 of separate
assets. When he died, if the estate tax exemption was $1,500,000,
there is an extra $500,000 which is subject to the estate tax.
John could pay the $225,000 or so estate tax liablility when
his personal income tax return is filed, he could give the full
amount to Ann, or he could place the $500,000 in a special "marital
deduction" trust whose disposition and assets Ann could
determine when she died. The governing issue here is control
over tax savings.
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A Qualified Terminable Interest Trust
The 1981 law permits the spouse who dies with the option to
place the amount exceeding the exemption amount in a Qualified
Terminable Interest Trust, commonly called a "QTIP Trust."
This is a special, irrevocable
trust for the surviving spouse's benefit, and the trust
must continue throughout that surviving spouse's life. The surviving
spouse, also, is required to receive all income generated by
the trust from such sources as net rental income, dividends,
and interest, but any capital gains realized through the sale
of assets held in the trust may be kept in the trust, which
would then be responsible for the tax.
The surviving spouse may receive payments from the trust, but
until he or she dies, no one else is eligible. The surviving
spouse may raid the principal amount of any of the trust's assets
for his or her health, support, education, or maintenance as
long as the trust documents do not specifically prohibit such
withdrawals. Legally, the only requirement is that only the
surviving spouse will receive all the trust's income.
When the surviving spouse dies, the trust's assets pass in accordance
with the first spouse's designation. The surviving spouse has
no control over how
the assets are distributed. Estate taxes are paid from the
trust on its assets when the surviving spouse dies, which saves
those who receive the trust's proceeds from any tax liability.
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Qualified Terminable Interest Trust Requirements
Included in the requirements for a Qualified Terminable
Interest Trust are the following:
1. When the estate tax return is filed, the trust's
executor or tax preparer must make an election that
the special trust be treated as a qualified terminable
interest trust.
2. All income from the trust must be paid only to the
surviving spouse for the remainder of his or her life.
3. As long as the surviving spouse lives, no other person
may receive any payments from the trust.
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The Point is Control, not the Estate Tax
For most couples with a
living trust, the first spouse who dies leaves the maximum
allowable amount exempt from the estate tax, $1,500,000 or $3,500,000,
in an irrevocable trust. Amounts above this amount can either
be left to the surviving spouse, placed in a revocable
trust that can be controlled by the surviving spouse, or
placed in a qualified terminable interest trust. All of these
possibilities shield the assets from taxation when the first
spouse dies. When the surviving spouse dies, however, the taxes
on the assets are due.
The sole issue here is control of the assets. Most
couples who have been married for a long time and who
don't have children from any prior marriages usually
arrange for the assets of the first spouse who dies
to be left outright to the surviving spouse or placed
in the surviving spouse's revocable trust. If the first
to die has children from an earlier marriage or a large
quantity of separate property, the point becomes one
of control and a qualified terminable interest trust
may be a solution.
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In Summary
A qualified terminable interest trust creates two irrevocable
trusts upon the death of the first spouse instead of just
one. This creates additional complications, but is a way
to insure the surviving spouse does not change the disposition
of the assets.
If there is a large amount of separately held property, children
from a former marriage, or if there is a strong desire to insure
that the assets go to certain relatives, charities, or other
institutions, a qualified terminable interest trust may be warranted.
It allows the spouse full control over his or her assets and
if such control is paramount, a qualified terminable interest
trust may be desirable. THE MAMOLA LAW FIRM, APC is conveniently located throughout Orange County. For additional information, please contact us at (949) 333-6543.
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