Do You Need A QTIP Trust?

A QTIP trust is sort of like a family trust – with some very distinct differences. “QTIP” stands for Qualified Interest Property”.  Let’s dive in.

QTIP trusts protect both you, your spouse (and your children) after either of the spouses exit the relationship through death or divorce. More specifically, the QTIP protects your assets from people your surviving spouse may get mixed up with once you are out of the financial picture. This is a huge issue for people who have carefully put together a financial plan. Who wants to go through all the work of amassing an estate only to have it squandered or swindled away later on? Nobody.

What Is The Problem?

Most people who set up trusts create family or living trusts. These can be great legal documents and are very powerful. But if you and your spouse make such a trust, you also have the capacity to change it. Normally, that’s very good. But what happens if there is a divorce or death and the surviving trust owner isn’t that financially astute?   They might make unwise changes. No bueno.

Survivors are often the target of scam artists and clueless new partners. Even if your surviving spouse manages to stay away from the low-life’s, what’s to stop him or her from crazy overspending when you aren’t around to keep a lid on it?

We’ll I’m not an attorney as you know so I can’t provide legal advice. But if you have concerns like these, look into a QTIP trust. Is you set it up properly, your assets will move into it after the first spouses dies and it may offer a great deal more protection than a typical living trust.

How Does The QTIP Work?

In order to have a legal QTIP trust, the surviving spouse has to be a U.S. citizen for starters. Also, all of the income generated by the trust has to be paid out to the survivor (and only to the survivor) at least once a year.

The survivor can’t be the trustee of the trust – a big difference from your living trust. In fact, the survivor can’t have any control over the trust or its assets. The trustee can pay out some of the principal of the trust to the survivor in order to help them afford normal living expenses or for medical expenses.

The Benefit

As I explained, the survivor must receive all the trust income and has some limited access to the principal of the trust should the trustee so decide. But the survivor can’t invade the trust assets whenever he or she feels like it and (most important) the survivor can’t name new beneficiaries.

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The Problems

QTIP trusts solve lots of problems. But they stir up a few issues too. First, the surviving spouse is entitled to all the trust income as I said before. In fact, the spouse can force the trustee to replace any trust asset that doesn’t generate income with other assets that do. That can ruffle some feathers.

The other beneficiaries, usually the kids, may be interested in growth and not income. This clash is important because of the long-term nature of the trust. If the survivors lives a very long time and buy bonds (for example) the children may give up a fortune in foregone growth.

One solution to this problem could be to distribute at least some assets to the children at the same time the QTIP trust is established. Let the kids invest or spend as they wish and use the balance in the QTIP trust to generate the income. This will diminish the amount the survivor can invest to create that income but, depending on the situation, it just might keep peace in the family.

This strategy might work but you have to make sure you have enough in the pot to satisfy the survivor’s need for income and the children’s’ desire for growth.

Bottom line? Before going down this road, make sure you speak with a qualified attorney and make sure you have a solid financial plan. It may cost you a few pesos but with so much at stake, it’s worth it.

Would a QTIP trust work for you? Why or why not?