QTIP Trusts for Second Marriages

QTIP, in connection with trusts, stands for “Qualified Terminable Interest Property”. These trusts are ideal for those who are in second or later marriages and are confronted with balancing the needs of their surviving spouse when they die while still providing an inheritance for their children from a prior marriage.

Essentially, this type of trust continues free of estate tax for a surviving spouse, providing them with income for life (i.e. interest and dividends) and principal, if needed, with either the surviving spouse themselves or someone else in charge as trustee or both the spouse and someone else as co-trustees. The someone else may be another family member, a bank or trust company or a lawyer or other professional, such as an accountant. The financial advisor, while often a close confidant and long-serving professional, is not advised in cases where they are still handling the family finances due to a conflict of interest. In addition, many financial institutions prohibit their advisors from acting as trustees.

QTIP trusts allow the grantor (creator) of the trust to stipulate where the assets go after the surviving spouse dies, presumably to the grantor’s children from a prior marriage.

QTIP trust assets are sheltered from any liabilities of the surviving spouse and professional management may be arranged. There are also major psychological and social benefits in that (1) the children from the prior marriage know that their inheritance is protected from being squandered or diverted, and (2) they may continue and even enhance their relationship with the surviving step-parent once the fear of being left out has been removed.

While the surviving spouse may legally act as sole trustee of the QTIP trust, for the foregoing social reasons this may not be advisable.

Some of the rules associated with a QTIP trust are that all income must be paid out to the surviving spouse every year, the spouse must be a US citizen, and there may be no other beneficiaries during the surviving spouse’s lifetime.

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