Orange County, Southern California Estate Planning Attorneys

Living Trusts for Married Couples

QTIP TRUSTS: “QUALIFIED TERMINABLE INTEREST PROPERTY”

A QTIP (Qualified Terminable Interest Property) trust is a trust for the life of a surviving spouse that provides him or her with income that qualifies for the marital tax deduction.  A QTIP trust is primarily meant to provide a surviving spouse with the ability to manage and control assets after the first spouse dies, while ensuring that the first spouse’s beneficiaries will not be disinherited.

If you or your spouse is a U.S. citizen, you can leave him or her an unlimited amount of assets with no estate taxes when you die.  This is called the “unlimited marital deduction.”  The government allows this deduction because it plans to collect the taxes when your surviving spouse dies.  A QTIP trust qualifies for this “marital deduction” as long as the trustee or executor of the decedent’s estate makes the necessary election on the estate tax return, so that the federal estate tax is reduced or avoided on the death of the first spouse. 

The QTIP trust is also particularly useful for couples who have been married before and/or have children from prior unions because each spouse can set forth the disposition of the principal of the property in the QTIP trust after the death of the surviving spouse to go to his or her desired beneficiaries, thus leaving each spouse with the peace of mind that their beneficiaries will still receive an inheritance.

QDOT TRUSTS: “QUALIFIED DOMESTIC TRUST”

An extension of the QTIP trust is the Qualified Domestic Trust, specifically designed for couples with a non-citizen spouse. The government assumes that a spouse who is not a U.S. citizen may take the assets after the first spouse dies, and leave the country before allowing those assets to be taxed.  Therefore, non-citizen spouses do not qualify for the unlimited marital deduction.  So, everything is your estate over the amount of the estate tax exemption when you die will be subject to immediate estate taxes on the death of the resident spouse.

The QDOT trust allows a non-citizen spouse to qualify for the marital deduction and avoid the immediate federal estate tax on all of the non-exempt property.  To qualify, at least one trustee of the QDOT must be a U.S. citizen or U.S. corporation.  In addition, the non-citizen spouse can receive income from the trust and may also receive principal for basic living expenses at the discretion of the trustee.

While the income the spouse receives from the QDOT is still taxed as ordinary income, any amounts received from the principal of the trust (with an exception for “hardship”) and assets remaining in the QDOT upon the second spouse’s death will be taxed as if they were part of the first spouse’s estate.  Without a QDOT, these estate taxes would have to be paid upon the death of the citizen spouse.  A QDOT delays the tax bill until the second non-citizen spouse dies, leaving more assets to the surviving spouse for use during his or her lifetime.

Because of the complexity of this type of trust, and the ramifications of not having a QDOT, you should contact a qualified Orange County estate planning attorney as soon as possible if you or your spouse is not a US citizen.

Please call (714) 573-7149 for a free initial consultation to discuss your estate planning needs.