The Lifetime QTIP Trust (Or How to Maintain Control of Your Estate and Keep Spouse No. 2 Happy)

Estate planning for couples in a second or subsequent marriage can be tricky, especially if their estates are disproportionate or where there is concern about second marriages. One solution for allowing the well-to-do spouse to maintain control of their property and wealth–but keep their other spouse happy–is the “Lifetime QTIP Trust.” 

The Basics of Creating a Lifetime QTIP Trust

In the estate planning world a “QTIP Trust” (qualified terminable interest trust) is a type of trust that allows a spouse to transfer an unrestricted amount of assets into trust for the benefit of their spouse free from estate and gift taxes.

A common estate planning strategy for couples has been to make use of a QTIP Trust after the first death under the “AB Trust” structure: After the first spouse dies, the “B Trust” holds an amount equal to the federal estate tax exemption (currently $11.58 million in 2020) and the “A Trust” holds the excess. Under this strategy the “A Trust” is in fact a “QTIP Trust” which qualifies for the unlimited marital deduction, meaning that property passing into the trust will not be subject to estate taxes until the surviving spouse dies. An increasingly common (and in many cases preferable) alternative is to utilize the tax code’s “portability” provisions to instead pass the unused estate tax exemption credit to the surviving spouse, in which case all assets would pass into the QTIP trust.

But what if instead of creating and funding the QTIP Trust after death, the wealthy spouse creates and funds the QTIP Trust for their spouse’s benefit with tax free gifts while the wealthy spouse is alive? This is the “Lifetime QTIP Trust” which must meet the following criteria to qualify for the unlimited marital deduction:

• The trust must be irrevocable.
• The beneficiary spouse must be a U.S. citizen.
• The beneficiary spouse must be entitled to receive all of the net income from the trust at least annually.
• The beneficiary spouse must have the right to demand that any non-income producing property be converted into income-producing property.
• The beneficiary spouse must be the only one who has the power to appoint trust property.
• A federal gift tax return must be timely filed.

Planning With a Lifetime QTIP Trust Offers a Multitude of Benefits

Outright gifts to your spouse during life or after death lead to total loss of control. If you and your spouse have families from prior marriages or lopsided estates, while the well-to-do spouse will be just fine if the less wealthy spouse dies first, the opposite is not true. If you and your spouse are in this situation, or if you simply want control over assets after you pass away, a Lifetime QTIP Trust offers the following benefits:

• One spouse spouse can create and fund a Lifetime QTIP Trust without using any gift tax exemption.

• The generation-skipping transfer tax exemption is not portable, so a Lifetime QTIP Trust can be used to take advantage of the other spouse’s exemption. This might reduce overall taxes.

• During the beneficiary spouse’s lifetime, he or she will receive all of the trust income and may be entitled to receive trust principal for limited purposes.

• When the beneficiary spouse dies, the assets remaining in the trust will be included in his or her estate, thereby making use of the beneficiary spouse’s otherwise unused federal estate tax exemption.

• If the beneficiary spouse dies first, the remaining trust property can continue in an asset-protected, lifetime trust for the grantor spouse’s benefit (subject to applicable state law) and the remainder will be excluded from the grantor spouse’s estate when he or she dies.

• After both you and your spouse die, the balance of the trust can be designed to pass to the grantor spouse’s children and grandchildren or other beneficiaries chosen by the grantor spouse.

Do You and Your Spouse Need a Lifetime QTIP Trust?

As with other types of estate planning tools and strategies, Lifetime QTIP Trusts are not “one size fits all” and must be specifically tailored to each couple’s unique goals, family dynamics, and financial situation. Please call our firm if you think you and your spouse fit the Lifetime QTIP Trust profile and we will help you determine what will work best for your family.