A qualified terminable interest property trust (“QTIP Trust”) refers to a trust that allows for a marital deduction for property passing to a trust for the benefit of the surviving spouse, even though the decedent controlled the passing of trust property at the surviving spouse’s death. The QTIP Trust ensures a spouse to give a qualified income interest in the property to his or her spouse without incurring the federal gift tax, and at least some or all of the marital deduction property passes to the decedent’s chosen beneficiaries at the surviving spouse’s death (Tomin & Carcone, 2018). As a marital trust, QTIP Trust has three particularly compelling advantages in estate planning for married couples.
The first advantage of QTIP Trust is that QTIP plays a significant role in A-B-C trust planning. When a married couple has a sizable estate (usually exceeds double of the exemption limit for the estate and gift tax; According to the IRS, the estate and gift tax exemption limit is $11.58 million for an individual in 2020), they could benefit from A-B-C trust planning.
Assume a couple owns a $24 million estates. They wish to avoid their unnecessary estate taxes; they can establish A-B-C trust planning. A portion of $11.58 million will fund the marital or “A” trust, and another portion of $11.58 million will fund a bypass trust or “B” trust, and the remaining $0.84 million will fund a QTIP or “C” trust. When the first spouse dies, there is no estate tax due at that time. Because the estate holding in the “A” and “C” trust is allowed for the marital deduction and will be included in the surviving spouse’s estate; and the estate holding in the “B” trust is qualified to the exemption for the estate and gift tax limit. As a result, QTIP trust carves off of the first spouse to die’s remaining estate tax exclusion to the “B” trust.
Furthermore, a QTIP trust enables the grantor to make sure that the assets from the trust are passed on to beneficiaries of his choice after the surviving spouse dies. This is appealing for clients who have a blended family. In QTIP trust, the surviving spouse will receive a “qualified income interest” for life, while the remaining assets of the trust will be paid out to the beneficiaries specified by the grantor, such as a previous marriage child.
Lastly, the assets in the QIIP trust are included in the surviving spouse’s estate, and that the remainder interest beneficiary of the QTIP trust would be able to get a step-up basis over the final passing assets of the trust. That is a great way to avoid the potential capital gain taxes in the future, especially for the appreciated assets.
To learn more about the Financial Planning Program at California Lutheran University contact Graduate Admission at clugrad@CalLutheran.edu or visit us at https://www.callutheran.edu/academics/graduate/financial-planning/
Hratch J Karakachian, CPA, ESQ, is a senior adjunct faculty member in California Lutheran University School of Management. He has been teaching in the MBA in Financial Planning Program since 2013. He has taught Principles of Estate Planning, Income Tax and Strategy, Managerial Accounting and Foundations of Accounting and Finance courses.
Dr. Chia-Li Chien is a succession program director at Value Growth Institute, a succession consulting practice dedicated to helping business owners increase the equity value of their firms. Before her private consulting practice, she held several senior management positions in Fortune 500 companies. Dr. Chien is a director of the financial planning program in the School of Management at California Lutheran University. Dr. Chien is a frequent speaker about succession and retirement planning at national conferences and has published three books, including her most recent publication, “Enhancing Retirement Success Rates in the United States.” Dr. Chien serves on the boards of various national financial service associations. She holds a doctorate in financial planning and is a Certified Financial Planner (CFP®) as well as Project Management Professional (PMP®).
Jade Zhang is a graduate student at California Lutheran University expecting to graduate in July 2020. She is studying for a Master of Science in Financial Planning.
IRS. (2020). Estate tax. Received from: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.
Tomin, C., & Carcone, C. (2018). QTIP Trust. Principles of Estate Planning (3rd,ed.). P283. Erlanger, KY: The National Underwriter Company.