In situations where one spouse does not want the surviving spouse to be subject to the temptation or pressure to change the ultimate disposition of the couple's assets, a QTIP Trust can be set up to:

• protect and provide for the surviving spouse;
• keep control over who will receives the property that is left in the trust after the death of the surviving spouse;
• avoid estate taxes upon the death of the first spouse

QTIP stands for Qualified Terminable Interest Property. The QTIP Trust holds property, and entitles the surviving spouse to all the income from the property for her lifetime (payable annually or at more frequent intervals) or gives her the right to use the property for her lifetime.

Example: Second marriage situations can make good use of the Q-TIP Trust. In our example, Mr. Quinones has two children from a previous marriage. After the death of his first wife, he married Jennifer, and set up a QTIP Trust for her. (He could also arrange for the QTIP as part of his Will.)

When Mr. Q dies, Jennifer will get a lifetime interest in the income from the QTIP trust. If Mr Q names his children as the remainder beneficiaries, they will get the remainder of the property upon Jennifer's death.

Jennifer has no power to change the beneficiaries named in the QTIP. Mr. Q can rest peacefully, knowing that his children from his first marriage, will receive the assets remaining in the trust after the death of Jennifer. No person has a power to allocate any part of the property to anyone other than the surviving spouse.

The QTIP trust allows Mr. Q to balance his two estate planning goals:

1. provide income for spouse Jennifer Quinn - Quinones, and
2. make sure that all of their remaining assets pass to the children of his first marriage. If Jennifer remarries after Mr. Q's death, the QTIP assets do not become part of the marital assets of her subsequent marriage.

How much of Mr. Q's estate would go into the QTIP trust? As much as he chooses. Mr. Q may even decide to direct retirement plan assets to the QTIP. IRS Revenue Ruling 2000-2 says an executor may elect under § 2056(b)(7) to treat an IRA and a trust as QTIP when the trustee of the trust is the named beneficiary of the decedent's IRA. The surviving spouse can compel the trustee to withdraw from the IRA an amount equal to all the income earned on the IRA assets at least annually and to distribute that amount to the spouse, and no person has a power to appoint any part of the trust property to any person other than the spouse.

Potential Estate Tax and Income Tax Disadvantages: No estate taxes would be generated by Mr. Q's QTIP bequest to Jennifer (because of the 100% marital deduction), but:

• the full value of the remainder interest at the time of Jennifer's death must be included in her estate. If the QTIP assets appreciate in value during Jennifer's lifetime, this could lead to estate taxes upon her death, if her estate is over the exclusion amount. Mr. Q's children might have preferred to simply pay any estate taxes at Mr. Q's death, and take their inheritance immediately, but Mr. Q made the choice to take care of Jennifer.
• to receive the allocation of stepped-up basis under the carryover basis rules that take effect in 2010, the asset must have been owned by the decedent.  Jennifer will not own the assets in the QTIP.  Jennifer's executor therefore cannot allocate any of the capital gain to Jennifer's available $1.3 million for stepped-up basis.  The capital gain, at 15%, could result in $75,000 capital gains tax for the heirs, which would have been avoided if Mr. Q had given the $500,000 outright to Jennifer at Mr. Q’s death.  Mr. Q should closely monitor the assets he intends to pass through the QTIP trust.

The QTIP trust concept does offer flexibility following death. For example:

• a credit shelter trust can be drafted so that it potentially qualifies as a QTIP trust. If the full amount of the federal exemption passes to the credit shelter trust, Mr. Q's executor can elect to qualify part of the trust for the marital deduction in order to avoid state estate tax on the death of Mr. Q.
• a separate QTIP trust can be created to hold the difference between the federal exemption and the state exemption. This allows Mr. Q's executor to decide whether to avoid state tax by qualifying the difference between the federal exemption and the state exemption for the marital deduction.

To coordinate the tradeoff between state death tax savings and potentially higher federal estate tax, and the other factors important to the specific estate, we can use several approaches to funding the QTIP trust:

• a pecuniary amount, that gives a specific dollar amount
• a factional share of the estate
• a hybrid formula that combines a pecuniary amount and a fractional share.

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