Marital/QTIP Trust Attorneys Serving Southern California

Trusts in general are a useful legal instrument to avoid probate when the grantor of the trust passes on. A marital trust, as well as a QTIP trust, also provides the additional benefit of protecting more assets from federal estate taxes.  

A marital trust is designed to provide for a surviving spouse when the other spouse passes on. A QTIP, or qualified terminal interest property trust, is often used by those in a second marriage who want to provide both for the surviving spouse and for their children from a previous marriage. Unless the assets in either type of trust are pretty high, there will be no estate or gift taxes. 

If you are looking to create an estate plan to take care of your spouse, or your spouse and children from a previous marriage, anywhere in Southern California, contact our estate and probate attorneys at Bochnewich Law Offices. We will help you create a marital trust or a QTIP trust depending on your life’s situation and your wishes for your loved ones.

We proudly serve clients throughout the counties of Los Angeles, San Bernardino, Riverside, Orange, and San Diego. 

Marital Trusts: An Overview

A marital trust is also known as a “bypass” trust—because it enables one spouse’s assets to transfer tax-free to the other spouse when they pass on. Assets can be just about anything from stocks, bonds, cash, real property, and more. The person creating the marital trust is known as the grantor, and the surviving spouse will be the beneficiary.  

The trust must also designate a trustee to administer the assets (AKA the principal) and transfer them to the beneficiary. To be considered valid, a marital trust must name at least one trustee—this can be the spouse, a family member, a friend, or a professional fiduciary. 

Again, the principal feature of a marital trust is that the assets will pass tax-free to the surviving spouse. The IRS won’t levy federal estate taxes, according to Section 2056 of the Internal Revenue Code, which is known as the “marital deduction rule.” The surviving spouse will receive income from the trust, as well as have access to the principal, depending on the original agreement. If the grantor includes what is called a “general power of appointment,” then the surviving spouse can instruct the trustee to transfer trust assets. However, the withdrawal can be limited to a certain amount. 

The surviving spouse may also be able to decide on who the beneficiaries should be when that spouse dies; though, generally, the trusts are set up so the couple’s children are the ultimate beneficiaries. 

QTIP Trusts: An Overview

QTIP trusts are similar to marital trusts in providing the marital deduction so that assets transfer tax-free. A qualified terminal interest property trust allows the grantor to name the ultimate beneficiaries. So, a QTIP is often used when the grantor has children from a previous marriage that he or she wants to ultimately benefit from the trust assets, but the grantor could really name anyone as the ultimate beneficiary. 

A QTIP trust must be income-generating so that it can financially support the surviving spouse. Payments must be made at least annually to qualify under the eyes of the IRS. The IRS advises:  

“Under § 2056(b)(7)(B)(ii) [of the Internal Revenue Code], the surviving spouse has a qualifying income interest for life if (I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct interest for life in the property, and (II) no person has the power to appoint any part of the property to any person other than the surviving spouse.” 

Note that the assets can only be used to support the surviving spouse and cannot be distributed to anyone else while that spouse is alive. Also, only spouses who are U.S. citizens can establish marital or QTIP trusts. Domestic partners have to seek an alternative trust arrangement. 

Avoiding Estate Taxes

Technically, estate taxes will be due when the surviving spouse passes on, but under current law, each spouse is allowed a deduction of $12.92 million, which can be combined under the law’s portability provision to create an exemption of $25.84 million.  

In other words, the trust assets would have to exceed $25.94 million to be subject to any taxes. The ultimate beneficiaries of either trust would then be free of any taxes unless the assets exceeded $25.85 million. Without a marital or QTIP trust, however, only $12.92 million would be shielded when the surviving spouse died. 

You should also note that this exemption is set to expire in 2025 unless Congress votes to renew it or make it permanent.