A qualified terminable interest property trust (QTIP) allows a surviving spouse to draw income from assets originally owned by their deceased spouse for the remainder of their lifetime. After the surviving spouse passes, the remaining property in the trust is transferred to the beneficiaries.
Originally, the main purpose of a qualified terminable interest property trust was for couples to use their unlimited marital deduction for estate taxes without one spouse surrendering complete control of assets to the survivor. Currently, the estate tax deduction for individuals and couples is extremely high, making this benefit only applicable to a select number of ultra-wealthy households.
Even still, there are many other tangible benefits to creating a qualified terminable interest property trust — even for couples that aren’t in danger of maxing out their lifetime estate tax exemptions. These unique trusts provide well for surviving spouses while still giving the grantor control over who ultimately inherits their estate.
Speak to a New Mexico qualified terminable interest property trust lawyer to learn more about options that can help you succeed in your estate planning goals. Schedule a no-obligation consultation and estate plan review with New Mexico Financial & Family Law today when you call 505-503-1637 or contact us online.
Trust formation can be exciting, kind of like starting a new business or a new investment. But just like those other two things, creating a trust should only be done after putting in a lot of research and preparation.
To ensure that any trust you create is capable of delivering on your most important goals, New Mexico Financial & Family Law always begins the process with a thorough review.
Any decision made about a trust should be considered in reference to what your entire estate might look like at the time of your death. As such, we ask that you bring in documentation that can give us an overview of what assets you feel are most relevant.
Important documents to bring might include:
A New Mexico qualified terminable interest property trust lawyer can review all of this information with you to get an idea of what assets you would want to put in such a trust, as well as those you might intend to leave out. Then, we will discuss your overall goals for estate planning and consider all available options in light of those goals.
An attorney may recommend the creation of a qualified terminable interest property trust if your goals include financial security for your surviving spouse and guaranteed asset distributions to your intended heirs. If you have additional goals, such as reducing taxes by gifting to charity or protecting assets from possible creditor claims, then we may recommend another type of trust in lieu of or in addition to a QTIP.
None of us can know for certain what the future may hold, but working with an experienced New Mexico qualified terminable interest property trust attorney can give you confidence about what legacy you will leave behind after you pass on. Come visit us at New Mexico Financial & Family Law to gain peace of mind and know with confidence that your most cherished family members will be well cared for after you are gone.
Just like other trusts, a qualified terminable interest property trust is formed when the trust creator (called a “grantor” or “settlor”) transfers assets into the trust. The trust then becomes the legal owner of these assets.
A trustee manages the trust’s contents and is responsible for ensuring that the listed beneficiaries ultimately receive their designated transfers.
With a qualified terminable interest property trust, there are a few unique qualities:
The defining characteristic of a QTIP is that it is qualified to comply with specific IRS requirements (IRC Section 2056(b)(7)) so that the transfers to the trust still count as a spousal gift.
This rule was created as part of the Economic Recovery Tax Act of 1981 (ERTA). Prior to this, only certain spousal gifts could qualify for the unlimited marital deduction.
The spouse had to be given full ownership and unrestricted use of any property transferred.
Giving surviving spouses total control over assets to qualify them for the marital deduction created issues for estate planning. The transferring spouse then had no guarantee about who would eventually inherit the assets — or whether there would even be any assets left to inherit.
After 1981, the IRS laid out rules defining what would count as a qualified terminable interest property trust. Giving the surviving spouse a legitimate lifetime interest in the property by way of an income on proceeds satisfied the requirement for the transfer to substantially benefit that spouse.
On the other hand, the arrangement still allowed for the requirements that the property would eventually be distributed to other heirs without the surviving spouse being able to object to or modify these transfers.
Currently, most households do not need to use creative trust arrangements like this in order to avoid maxing out their lifetime gift and estate tax exemption. Nevertheless, there are other advantages to creating a qualified terminable interest property trust, which we will outline below.
As of 2024, the total amount an individual can exempt from estate and gift taxes is $13.61 million. After 2025, the amount will revert to the previous schedule of $7.2 million per person unless Congress takes steps to renew the Tax Cuts and Jobs Act of 2017 (TCJA) provisions or draft new ones.
While many households are in no danger of breaching this threshold amount, they still might be able to benefit from the creation of a qualified terminable interest property trust in other ways.
In some ways, a New Mexico qualified terminable interest property trust operates similarly to a charitable lead trust — except the initial income recipient is a spouse and not a charitable organization.
With a charitable lead trust, assets are placed into a trust and used to generate additional interest. A charitable beneficiary receives a steady income from this interest for a number of years, and then when the trust terminates, a beneficiary receives the remainder.
In a similar fashion, a QTIP trust enables assets to generate income before they are handed over to another beneficiary. This situation ensures that a surviving spouse is properly cared for for the remainder of their life and that they are able to benefit from the hard work of their now-deceased spouse.
While the surviving spouse isn’t allowed to sell the assets in the trust or otherwise access them (although some QTIP trusts permit a certain level of use of the principal by the spouse), they still get to benefit from them financially.
This situation reduces the risk that the surviving spouse feels spurned by the grantor and their decision not to leave the assets to them outright. Such an arrangement is particularly beneficial in blended families, where the bulk of the deceased spouse’s assets are perhaps gifted to their children from a previous marriage rather than spread evenly throughout the entire extended family.
When assets are placed into an irrevocable trust, they are removed from the control of the grantor as well as anyone else in their family. They can only be distributed back to someone according to the terms of the trust’s standards of distribution.
This arrangement eliminates the risk that some assets will be spent down or altered before they reach the beneficiary, against the wishes of the original grantor. They will be managed by the trustee and allowed to appreciate before being handed over to the intended recipient at the designated time.
A common problem with using a will to transfer all assets to beneficiaries — beyond the fact that it requires assets to go through probate — is that the transfer is immediate.
With a trust, property can be held in the trust until certain conditions are met. This arrangement is ideal for gifts going to individuals who are currently a minor, for example, so that they can receive the money when they are presumably old enough to manage it responsibly.
Other rules can be created, as well. A distribution may only occur when a relative graduates college, for instance, or has their first child.
The grantor can create any number of rules to guide the trustee’s decision and ensure that their legacy goes to the right person at the right time.
Just in case a surviving spouse would be inclined to spend the entirety of their deceased spouse’s estate, a qualified terminable interest property trust can prevent this from happening. At the same time, the surviving spouse still receives income, providing benefits to all of the grantor’s most valued loved ones.
A QTIP can be given equity ownership of a closely held business interest, generating income for a surviving spouse without affecting the actual management of the business itself. Ownership of the business can then transfer to a chosen beneficiary after the surviving spouse passes.
The beneficiary of the QTIP trust does not have to be a person but can instead be a charitable organization (possibly producing tax savings benefits) or another trust.
A 1992 U.S. Circuit Court opinion determined that a qualified terminable interest property trust could be created at the discretion of the surviving spouse from the contents of their deceased spouse’s estate.
In other words, you don’t necessarily have to decide to create a QTIP trust in advance, and you can choose to do so after your spouse has passed. However, it can be in everyone’s best interests to have a QTIP set up in advance so that the grantor can make their wishes and instructions clear before their death.
When creating a qualified terminable interest property trust in New Mexico, the grantor can designate that only a portion of their trust operates in this way. The remainder of the trust can retain its own income, for example, or distribute it to another beneficiary.
Note that only the QTIP portion of this trust will qualify for the marital deduction.
While their primary uses have changed slightly over the years, qualified terminable interest property trusts have remained popular for a reason.
Get help with your QTIP formation and other estate planning from New Mexico Financial & Family Law. Your New Mexico trust lawyer will advise you on the most advantageous arrangements available, allowing you to choose the perfect estate plans to ensure your goals are met — for this life and the next.
Schedule a no-obligation consultation with a New Mexico qualified terminable interest property trust attorney today when you call our firm at 505-503-1637 or contact us online.
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