In Estate planning, QTIPs are not devices used to clean your inner ear; the term “QTIP” refers to qualified terminable interest property. This is further defined and referenced in the Internal Revenue Code 2056(b)(7). http://www.law.cornell.edu/uscode/26/usc_sec_26_00002056—-000-.html . How can you tell if you have this type of property in Trust? Put simply, QTIP property is property that operates as life estate interest would: the property is used for the benefit of one person, “A”, during A’s lifetime. However, “A” does not “own” the whole interest; the interest instead has been split. “A” only owns a life interest in the property (a right to use during A’s lifetime to the exclusion of everyone else) and when A dies, so does A’s interest in the property. Who owns it then when A dies? That depends on who set up the QTIP and how he chose to structure it.
Social impact
Why would you want to consider making your trust conform to QTIP rules? Well, there are plenty of reasons. A lot of couples may use this technique when there is a second marriage or children from a prior a relationship. A spouse may want to ensure that his or her children may still inherit property but at the same time be sure that the surviving spouse is left with sufficient assets to care for herself/himself. A QTIP trust allows the surviving spouse to have access to the whole estate (or the whole property in the QTIP Trust) during his/her lifetime—this means that the decedent client does not have to make decisions regarding how property will be split. Unlike leaving everything to the surviving spouse outright, by using a QTIP trust, the client has ensured that the trust property will pass at the surviving spouse’s death to the client’s chosen parties. The property in the QTIP trust passes to the client’s named beneficiaries at the death of the surviving spouse to the exclusion of the surviving spouse’s creditors and heirs.
Tax impact
There are also tax reasons that a QTIP trust may be preferable to some clients. A QTIP trust allows for the use of the unlimited marital deduction while still allowing for ultimate control and disposition of the asset by the decedent. Remember, anything you leave to a spouse is not subject to estate tax; the tax is instead levied on the estate on the surviving spouse when she dies. In the absence of planning, just leaving everything to the surviving spouse does nothing to diminish the estate tax burden—it simply defers it. If the client instead left everything to a trust for the benefit of kids/spouse/charity, etc., that trust would be subject to the estate tax immediately upon the death of that client.
Through the use of the QTIP trust, a trust that would otherwise be completely subject to an estate tax, is instead subject only the portion/percentage of the trust that does not go to a surviving spouse (this is complicated and determined at the first spouse’s death using the life expectancy of the surviving spouse). Even then, the estate tax is levied on the first spouse’s estate only after the death of the surviving spouse. It is better to have cash on hand and defer taxes; after all, you can manage your money better than Uncle Sam and for better rates.
This is also important on the state level because while Florida currently does not collect a State Estate Tax, Ohio continues to collect an Estate Tax until January 2013. This means that, in addition to any Federal Estate tax, all Ohio residents who die before January 2013 and who have estates valued at $338,333.00 or more are subject to the Ohio Estate tax. A client may be able to avoid this eventuality. Where a client’s trust is QTIP-ed and the client leaves a surviving spouse who likely will not pass away until after 2013—the client and estate have deferred a tax that may not be in effect at the time the surviving spouse passes away.
QTIP trusts are complicated but very useful vehicles that you may want to consider for your own estate. As always, you should consult with a professional who can advise you according to your personal needs and planning.
This article was written by Jessica B. Moon, Attorney licensed in Ohio and Florida. David Bacon and Jeffrey Roth are partners in Roth & Bacon Attorneys, LLC; Jessica Moon is an Associate. The Offices are located in Upper Sandusky, Marion, and Port Clinton, Ohio, and Fort Myers, Florida. They have focused their practice to provide estate and business planning concepts to their clients. Nothing in this article is intended for, nor should be relied upon as individual legal advice. The purpose of this article is to help educate the public on concepts of law as they pertain to estate and business planning. Copyright @ Jessica B. Moon 2011.
