Coral Gables trust attorneys

Acquiring assets may be an important goal; however, protecting the assets that you acquire is an even more important estate planning goal. Both a Qualified Terminable Interest Property trust (QTIP) and a Qualified Domestic Trust (QDOT) are specialized irrevocable trusts that can help you to protect your assets. Knowing whether a QTIP or a QDOT is the better option for your situation is the key to maximizing the benefits offered by these trusts. To help you decide which one is right for you, the Coral Gables trust attorneys at Stivers Law explain both a QTIP and a QDOT trust.

When Might a QTIP Be the Right Choice?

If you are remarried, during your first marriage you probably planned to leave all your assets to your spouse with the understanding that he/she would then pass those assets on down to your children upon death. Your spouse executed a reciprocal Will and/or a reciprocal estate plan. Whoever died first left everything to the other spouse/parent and everything went to the kids when both parents were gone. Now, you want to provide for your new spouse; however, you still want some of your estate to go to your children. One option is to leave everything to your current spouse and count on him/her to leave those assets to your children upon death. That would require you to have complete faith that your spouse would follow your wishes instead of squandering, or otherwise depleting, the assets before the end of his/her life. The reality is that after you are gone, your spouse will have complete control over those assets with no legal constraints on their use. Ultimately, your children could wind up with nothing. A better option is to create a Qualified Terminable Interest Property, or QTIP, trust.

A QTIP trust is a specialized type of irrevocable trust that works well for a Settlor who is part of a blended family. A QTIP trust operates in basically the same way as any other trust. You will need to appoint a Trustee to oversee the administration of the trust and to manage the trust assets. Assets transferred into the QTIP trust are not actually gifted to your current spouse when you die. Instead, your spouse receives income from the trust assets but cannot withdraw the principal from the trust nor can he or she decide on the ultimate disposition of the trust assets. In the case of real property, your surviving spouse may also receive a “life estate” in the property, meaning that he or she may remain in the home until death, but will never own the property outright. When your surviving spouse dies all assets held in the trust are then transferred to the intended QTIP trust beneficiaries, typically your children from a previous marriage. Although a QTIP trust does not qualify to use the Marital Deduction rule to defer federal gift and estate taxes under traditional tax rules, the Executor of your estate can elect to use the deduction on your estate tax return.

When Might a QDOT Be the Right Choice?

In the 21st century, it is becoming more and more common for people to live, work, and even marry outside of their birth country. In fact, in 2013 the United States Census Bureau reported that one in five marriages in the U.S. includes a spouse born outside the U.S. Of those marriages, about 60 percent of the foreign-born spouses have become naturalized citizens, leaving the remaining 40 percent as non-citizens. As the U.S. rapidly turns into the melting pot it has always claimed to be, “mixed” marriages have become more commonplace; however, they can still create some estate planning challenges. 

To avoid paying federal gift and estate taxes, one fallback option has always been to leave your entire estate to your spouse using the unlimited marital deduction. As the name implies, the unlimited marital deduction allows you to leave an unlimited amount of assets to a spouse tax-free.  Unfortunately, the deduction is not available, however, if your spouse is a non-citizen. The unlimited marital deduction sounds great; however, all it usually does is delay the payment of gift and estate taxes. Ultimately, the surviving spouse ends up payment the tax debt when he/she dies. If the surviving spouse is a non-citizen though, there is a very high probability that the assets will be moved out of the country prior to his/her death and Uncle Sam will not receive anything. To protect against this happening, the deduction cannot be used if your spouse is a non-citizen.

A Qualified Domestic Trust, or QDOT, provides a solution to the problem created by the exception to the unlimited marital deduction. With a QDOT, you can transfer all assets intended for your spouse’s benefit into the trust and your spouse will be entitled to the interest from those assets but will not own the assets. Your spouse will not be entitled to access the principal held in the trust unless he/she can demonstrate a hardship need. The only time your spouse can access the principal is if your spouse can demonstrate an “immediate and substantial” need for money relating to “heath, maintenance, education or support” of either your spouse or someone your spouse is legally obligated to support, such as a child. Upon the death of your surviving spouse, the assets held in the trust will be distributed to the beneficiaries named in the trust, usually children and/or grandchildren. If any federal and/or state estate taxes are due at that time they will need to be paid at the time of distribution.

Contact Coral Gables Trust Attorneys

For more information, please join us for an upcoming FREE webinar. If you have additional questions or concerns about which type of trust is right for you, contact the experienced Coral Gables trust attorneys at Stivers Law by calling (305) 456-3255 to schedule an appointment.

Author Bio

Justin Stivers is the founder and managing attorney of Stivers Law, an estate planning firm specializing in wills, probate, trust administration, and financial risk management services. Justin’s approach goes beyond just creating legal documents. From aligning investments with estate plans to ensuring comprehensive insurance coverage, he safeguards a client’s legacy from unforeseen circumstances. His commitment extends beyond individual transactions, fostering lifelong partnerships to provide ongoing support and guidance.

With an impressive track record, Justin is licensed by the Florida and the Tennessee State Bars. His professional portfolio boasts Series 65 registration as a Registered Investment Advisor, the Wealth Management Specialist™ designation, and a 2-15 License for Health, Life, and Annuities. His dedication to excellence has earned him positions like Board Member of the Estate Planning Council of Greater Miami, Business Eagle Member of the Florida Justice Association, and active membership in esteemed organizations like the American Academy of Estate Planning Attorneys.

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