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Love & Money: Part 2

Posted by Mona O'Connor | Mar 03, 2020 | 0 Comments

Estate planning for couples in a second or subsequent marriage can be tricky, especially if their estates are disproportionate. One solution for allowing the “well-to-do” spouse to maintain control of their property and wealth--and keep their other spouse happy--is the “Lifetime QTIP Trust.”  

The Basics of Creating a Lifetime QTIP Trust

In the estate planning world, a “QTIP Trust” (qualified terminable interest trust) is a type of trust that allows a wealthier spouse to transfer an unrestricted amount of assets into trust for the benefit of their less wealthy spouse, all while avoiding estate and gift taxes.

A common estate planning strategy for high-net-worth couples has been to make use of a QTIP Trust after the first death under the “AB Trust” structure. That is, after the first spouse dies, the “B Trust” holds an amount equal to the federal estate tax exemption (currently $11.58 million in 2020) and the “A Trust” holds any amounts over that exemption threshold. Under this strategy the “A Trust” is in fact a “QTIP Trust” which qualifies for the unlimited marital deduction (i.e., property passing into the trust will not be subject to estate taxes until the surviving spouse dies).  

But what if instead of creating and funding the QTIP Trust after death, the wealthy spouse creates and funds the QTIP Trust for their spouse's benefit with tax-free gifts while the wealthy spouse is alive? This is the “Lifetime QTIP Trust”! But to qualify for the unlimited marital deduction, this trust must meet the following criteria:

  • The trust must be irrevocable.
  • The less wealthy spouse must be a U.S. citizen.
  • The less wealthy spouse must be entitled to receive all of the net income from the trust at least annually.
  • The less wealthy spouse must have the right to demand that any non-income producing property be converted into income-producing property.
  • The less wealthy spouse must be the only one who has the power to appoint trust property.
  • A federal gift tax return must be timely filed.

Planning With a Lifetime QTIP Trust Offers a Multitude of Benefits

Outright gifts to your spouse during life or after death lead to total loss of control. If you and your spouse have families from prior marriages and lopsided estates, the problem is exacerbated by the difference in your wealth – while the well-to-do spouse will be just fine if the less wealthy spouse dies first, the opposite is not always true. If you and your spouse are in this situation, a Lifetime QTIP Trust offers the following benefits: 

  • The wealthy spouse can create and fund a Lifetime QTIP Trust without using any gift tax exemption.
  • The generation-skipping transfer tax exemption is not portable, so a Lifetime QTIP Trust can be used to take advantage of the less wealthy spouse's exemption. This might reduce overall taxes.
  • During the less wealthy spouse's lifetime, he or she will receive all of the trust income and may be entitled to receive trust principal for limited purposes.
  • When the less wealthy spouse dies, the assets remaining in the trust will be included in his or her estate, thereby making use of the less wealthy spouse's federal estate tax exemption that probably would have otherwise gone unused.
  • If the less wealthy spouse dies first, the remaining trust property can continue in an asset-protected, lifetime trust for the wealthy spouse's benefit (subject to applicable state law) and the remainder will be excluded from the wealthy spouse's estate when he or she dies.
  • After both you and your spouse die, the balance of the trust can be designed to pass to the wealthy spouse's children and grandchildren, or any other beneficiaries chosen by the wealthy spouse when he or she created the trust.

Should You Consider This Type of Trust As Part of Your Estate Plans?

As with other types of estate planning tools and strategies, Lifetime QTIP Trusts are not “one size fits all” and must be specifically tailored to each couple's unique goals, family dynamics, and financial situation. Please call O'Connor Law Offices if you think you and your spouse fit the Lifetime QTIP Trust profile and we will help you determine what will work best for your family.

About the Author

Mona O'Connor

Mona L. O'Connor joined the firm in 2008 and is currently a partner with O'Connor Law Offices. She is a J.D., C.P.A. and her primary areas of practice include estate planning and trust administration.


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