Olympia Estate Planning

Basic Questions About Estate Planning in Washington – What is a QTIP Trust?

The qualified terminable interest property trust, commonly referred to as the QTIP trust, is an advanced estate planning device that is often included in the estate plans of people with blended families. The QTIP trust is, like other trusts, designed to provide specific benefits, but is not suitable for everyone. In this article, we will take a closer look at QTIP trusts and how they work.

QTIP Trusts

Like all trusts, a QTIP trusts allows you to create a legal entity that can own property on behalf of a person or persons, known as beneficiaries, who get to use it. But, unlike many other types of trusts, QTIP trusts are designed to protect two different types of beneficiaries at different times.

Here’s how they work. First the person who establishes a QTIP trust, called a trustor or grantor, decides to transfer property into the trust’s name. The trustor will then name two beneficiaries: the life estate beneficiary, and the final beneficiary. Once the trustor dies, the life estate beneficiary will have the right to use the trust property, or receive income from it, but does not have the right to sell or transfer the property to others.

After the life estate beneficiary dies, the final beneficiary(s) receives the property and effectively becomes the new owner. Unlike the life estate beneficiary, the final beneficiary can dispose of the property as he or she sees fit.

QTIP Trusts and Blended Families

The main reason people create QTIP trusts is because they have a blended family and want to protect both their current spouse and their children from previous relationships. The QTIP trust does this perfectly.

When people with blended families create a QTIP trust, they typically name their current spouse as the trust’s life estate beneficiary, while naming their children as the final beneficiaries. So, if the trustor should die, that person’s spouse will be able to use or benefit from the trust’s property. After the surviving spouse dies, the trustor’s children from a previous marriage then inherit the property as the final beneficiaries. Through a QTIP trust, both the current spouse and the children from previous relationships will receive inheritances from the trustor.

QTIP Trusts and Washington State Estate Taxes

Another benefit conferred by QTIP trusts is that they allow you to exclude the assessment of estate taxes. By transferring a Washington QTIP trust, you can exclude up to two million dollars from the survivors estate. This means your heirs estate tax bill will be eliminated or reduced significantly.

If you’d like more information about QTIP trusts, contact us so we can discuss the issue in more detail.