QTIP Trusts

In California, as in many other states, a Qualified Terminable Interest Property (QTIP) Trust is a specific type of irrevocable trust used in estate planning to provide for a surviving spouse while also ensuring that the ultimate distribution of trust assets is carried out according to the grantor’s wishes. As a Folsom estate planning lawyer, I commonly use QTIP trusts for my clients who are subject to estate taxes. Here are the key features and details regarding a QTIP Trust in California:

1. Purpose of a QTIP Trust:
   • A QTIP Trust is primarily designed to provide for the financial needs of a surviving spouse while also allowing the grantor to retain control over the ultimate disposition of the trust assets upon the surviving spouse’s death.
2. Marital Deduction and Estate Tax Planning:
   • QTIP Trusts are commonly used in estate tax planning to take advantage of the marital deduction. Assets transferred to a QTIP Trust qualify for the marital deduction, which allows them to pass to the surviving spouse free from federal estate tax.
   • Although the federal estate tax exemption is quite high at $13.61m per person (as of 2024), there is an unlimited estate tax exemption for post-death transfers between spouses. 
3. Income for the Surviving Spouse:
   • The surviving spouse is typically entitled to receive all the income generated by the trust assets during their lifetime. This income provides financial support and security for the surviving spouse.
4. Principal Distributions at the Discretion of the Trustee:
   • The trustee of the QTIP Trust has the discretion to make principal distributions to the surviving spouse if necessary for their health, education, maintenance, or support. This discretion ensures that the surviving spouse’s needs are met.
5. Control Over Ultimate Beneficiaries:
   • The grantor can specify the ultimate beneficiaries who will receive the remaining trust assets upon the surviving spouse’s death. This allows the grantor to control the distribution of assets to their chosen heirs, typically children or other family members.
6. Irrevocable Nature:
   • Once assets are transferred into a QTIP Trust, they become irrevocable and cannot be altered or revoked without the consent of the trustee and beneficiaries, subject to certain exceptions provided in the trust document.
   • A QTIP trust is often times incorporated into a revocable living trust, but the QTIP trust only comes into existence after the trust creator dies. As such, the living trust itself is revocable by the creator during their lifetime, but the QTIP trust will only come into existence after the creator dies and is therefore irrevocable by its nature. 
7. Legal Requirements and Compliance:
   • A QTIP Trust in California must comply with state and federal laws, including the requirements for the marital deduction under federal tax law.
8. Estate Tax Considerations:
   • A QTIP Trust can help minimize estate taxes by deferring the taxation of trust assets until the surviving spouse’s death. At that point, the trust assets are included in the surviving spouse’s taxable estate.

Conclusion

QTIP Trusts are a valuable estate planning tool for married individuals who want to provide for their surviving spouses while maintaining control over the ultimate distribution of assets to their chosen heirs. Properly structured, a QTIP Trust can help minimize estate taxes and protect the financial well-being of the surviving spouse. Creating and managing a QTIP Trust involves complex legal and tax considerations. It is essential to work with an experienced estate planning attorney in Folsom who can help design and implement a QTIP Trust that aligns with your specific estate planning goals and complies with applicable laws. If you have any questions about QTIP trusts, contact Thapar Law at 916-579-0605 or send us a message.