Marital Deduction or QTIP Trusts

Marital Deduction or QTIP Trusts

The marital deduction or qualified terminable interest property (QTIP) trust is another of the many common types of trusts, but it is one that is used only for a specific purpose. This type of trust is not designed to avoid federal estate taxes upon the death of a surviving spouse, but rather to provide management and control of assets for a surviving spouse after the first spouse dies.

The trust is designed so that all assets in the trust qualify for the unlimited marital deduction, as would outright gifts to a spouse. Thus, the trust avoids estate taxes upon the death of the first spouse. The real advantage of the trust is the ability to have an independent trustee control and manage the assets for the surviving spouse, and the ability to determine the contingent beneficiaries, who usually are the children.

The trust frequently is used when the grantor has children from a prior marriage, and the grantor wants to ensure that a certain portion of his or her estate will pass to children from the prior marriage. This cannot always be assumed when the property is left outright to the surviving spouse. It is also used to prevent the "disinheriting" of children from the first marriage if the surviving spouse remarries. The trust also is used when professional management of the assets is desirable for the surviving spouse.

Tip

Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.

Tax Guide

Marital Deduction or QTIP Trusts