Inter-Vivos QTIP Trusts; Almost Perfect

For many years I have been, and remain, a fan of the inter-vivos QTIP trust.  There is no perfect estate planning, but this QTIP is almost perfect.   BTW, this is a brief, technical post primarily for advisors and practitioners who might find this topic useful for their clients.

This inter-vivos QTIP trust is a marital trust for a married couple designed under the QTIP tax laws.  QTIP, in tax law jargon, is “qualified terminable interest property.”

Essentially, one spouse creates and funds this inter-vivos QTIP trust while alive. The other spouse is the beneficiary of the QTIP trust. “Inter-vivos” is an old legal term meaning essentially “between the living”.  A trust someone creates while alive.  By contrast, a trust that only becomes operative when the person dies is a “testamentary” trust. Such as a trust provision in that person’s Last Will and Testament.

As an important aside, and part of the inter-vivos QTIP design, it is possible for the funding spouse later to become a secondary beneficiary of the QTIP trust if the other beneficiary spouse dies first. Also, the written provisions of the inter-vivos QTIP trust can include provisions for the children after both spouses’ deaths, etc.

In broad terms, the above inter-vivos QTIP trust provides the following benefits:

    1. It gives a married couple – while they are still living — asset protection for the assets in the inter-vivos QTIP trust.
       
    2. The inter-vivos QTIP trust is defective for income tax purposes from inception up to the death of the second spouse. This both-spouses duration of the defective status means no trust income tax returns, no compressed trust tax rates, and no separate 3.8% Medicare tax during the remaining lifetimes of both spouses.
       
    3. I am purposely repeating this above point. That is, defective during the lifetime of the spouse who creates the QTIP trust and during the surviving spouse’s lifetime. This effect on both spouse generally is not available for testamentary QTIP trust planning.
       
    4. The defective income tax status of this QTIP trust also allows the substitution of assets, called a substitution power. This can allow, if needed, stepped-up basis planning by later substituting into the QTIP trust high-basis assets for low-basis assets, etc.
       
    5. The inter-vivos QTIP, in my opinion, provides the optimal flexibility for portability options.
       
    6. The spouse’s funding of the inter-vivos QTIP trust starts the 5-year lookback period for Medicaid nursing home eligibility. This may be important in the event later the spouses need governmental Medicaid nursing home assistance. Medicaid planning – although generally not at the top of most family’s estate planning checklist – can greatly help prevent financial impoverishment of the other spouse (and possibly the children).
       

For readers who wish to delve into more technical aspects of this inter-vivos QTIP planning, I highly recommend the following breaking-ground 2007 article by well-known estate lawyers Mitchell Gans, Jonathan Blattmachr, and Diana Zeydel.   Click here for the link. It is a well-written article.

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