Estate planning is rarely something that one looks forward to, but it is vitally important, especially for high-income individuals. Wealthy Floridians have likely heard of the term, trust, because of their importance in estate planning. Indeed, this blog has spoken about them before, but today, our focus will be on Qualified Terminal Interest Properties Trusts, an extremely popular type of trust.
Overview of Qualified Terminal Interest Properties Trusts
QTIP trusts reduce post-death tax burdens for affluent couples’ beneficiaries, while simultaneously providing financial security for the surviving spouse and beneficiaries. The QTIP trusts starts on the death of one of the spouses, where the assets are then transferred by the surviving spouse, and then, after the surviving spouse passes away, the ultimate beneficiaries.
Mechanics of Qualified Terminal Interest Properties Trusts
At death, the deceased spouse’s asset move into the trust, and the profits from those assets can be utilized by the spouse and, if drafted to do so, other beneficiaries. However, these initial beneficiaries are limited to the profits generated by the assets, and they cannot control or change control of the QTIP trust assets.
Once the remaining spouse passes away, the QTIP trust does not dissolve. Instead, the trust is now transferred to the ultimate beneficiaries, often the couple’s children and grandchildren. These ultimate beneficiaries can access both the profits and income from the QTIP trust, along with the principle investments and assets.
The reason for the treatment of these assets in QTIP trusts is tax savings. Essentially, since the surviving spouse only has access to the trust profits, it is considered a life estate (an income interest), which avoids federal gift taxes.
Specifically, QTIP trusts can also qualify for the marital deduction. For example, if an affluent Floridian couple has an estate valued at $500,000, each spouse’s net estate value is then $250,000. With the marital deduction, that $250,000 can be transferred to the surviving spouse without incurring the IRS’s estate tax. This is because the marital deduction eliminates.
Proper estate planning
As readers can probably tell from this blog and prior blogs on trusts, these can get complicated, and there are a lot of options. This is why it is so important to contact an estate planning attorney to craft an individualized estate plan.