What is a Qualified Terminable Interest Property (QTIP) trust and when would I use it?
A Qualified Terminable Interest Property trust, commonly known as a QTIP trust for short, is a type of marital trust that offers flexibility in planning for your spouse and remainder beneficiaries upon your death, while also providing estate tax planning if needed.
QTIP trusts are popular amongst second marriages because unlike traditional marital trusts which give the spouse broad authority to use trust income and principal in any way they choose during their life, and may even permit the surviving spouse to change the beneficiaries at their death, a QTIP is essentially a means to provide in some way for the spouse, but ensures that whatever is left at their death is distributed to the first spouse’s chosen beneficiaries.
For example, a husband dies and leaves assets to his wife, to whom he has been married for 20 years, in a QTIP trust. He has two children from a previous marriage. The QTIP trust names his wife and his son as Co-Trustees. The Trust gives all the income earned therefrom to his wife, and also allows for principal distributions to her for her health, education, maintenance or support. Whatever is left in the trust at her death shall be distributed to his children. By structuring his estate plan this way, he provides necessary support for his wife during her lifetime, but ensures that anything remaining goes to his children.
At a minimum, QTIP trusts must at least give the surviving spouse an income interest for life. They may also provide for principal distributions, such as for health, education, maintenance and support, but are not required to provide same. At the death of the second spouse, all assets would be distributed to the beneficiaries listed in the original trust agreement or Will.
Despite the fact that a QTIP trust may be drafted to provide very little to the surviving spouse, they can still qualify for the unlimited marital deduction for estate tax purposes if a QTIP election is made on the decedent spouse’s estate tax return. In fact, you can even choose to make the election for certain assets in the QTIP trust, but not others. This allows the fiduciary of the estate to do estate tax planning and maximize both the federal and NY estate tax exemptions.
It is important to note that because some QTIP trusts may provide for principal distributions, they are not necessarily protected for Medicaid purposes. Medicaid can be applied for to cover the cost of long term care services not otherwise covered by Medicare and Secondary or Supplemental Health Insurance. In order to be eligible for Medicaid, an applicant must have limited resources. The Medicaid regulations provide that any trust in which a beneficiary is entitled to principal, other than a validly created Supplemental Needs Trust, is considered an available resource to a Medicaid applicant. If Medicaid planning is a goal, you should have your QTIP trust reviewed by an Elder Law attorney to see what options may be available to make revisions.
- Kimberly Trueman, Esq. and Nancy Burner, Esq.