This Is How a QTIP Trust Protects Your Kids' Inheritance

Smiling senior couple embracing after getting married

When it comes to estate planning in a second marriage, there can be competing goals — making sure your current spouse is provided for and ensuring assets go to your children from a previous marriage.

Luckily, there's an estate planning tool available to address this challenge — the qualified terminable interest property trust, or QTIP trust.

The 'Brady Bunch' safety net

About one-third of married Americans age 55 and older are in a second marriage. In a typical second marriage, leaving assets outright to a spouse can be risky.

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If you pass away first, those assets become your spouse's property. He or she could leave them to their own children or even a new partner.

A QTIP trust solves this by splitting the interest in your property:

For your spouse. They receive all the income generated by the trust assets for the rest of their life. These trusts can be drafted in such a way that principal can also be used for the benefit of the spouse under certain circumstances.
For your children. They're named as the remainder beneficiaries. They receive the principal only after your spouse passes away.

About Adviser Intel

The author of this article is a participant in Kiplinger's Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

Key benefits at a glance

Control. You, not your surviving spouse, decide where the remaining assets go
Tax deferral. Even though your spouse doesn't own the assets outright, the IRS treats the QTIP as marital deduction property
Asset protection. Because the assets are held in trust, they're generally shielded from your spouse's future creditors or a litigious new partner

Passing an IRA to your children via a QTIP

Using a QTIP trust as the beneficiary of an IRA is a complicated strategy, and it requires precision to avoid a massive tax bill.

Normally, naming a trust as an IRA beneficiary can trigger accelerated distributions, forcing the entire account to be emptied (and taxed) within 10 years.

To use a QTIP for an IRA without losing the tax advantages, you must follow strict IRS see-through or conduit rules:

1. The 'income' requirement.

To qualify for the marital deduction, the IRS requires that your spouse receives all income from the trust.

However, for an IRA held inside a trust, the IRS mandates that the spouse must receive the greater of:

The income generated by the IRA assets (dividends, interest)
The required minimum distribution (RMD) calculated on your surviving spouse's life expectancy

2. The trustee's role.

Your trust document must explicitly state that the trustee has the power to request funds from the IRA and pass it directly to your spouse. This ensures the IRA remains a "qualified" asset and maintains its tax-deferred status.

3. Protecting the principal for the kids.

While your spouse gets the annual "income" or RMDs to live on, the bulk of the IRA stays protected within the trust. When your spouse passes away, your children from your first marriage inherit the remaining IRA balance.

Tip: Be careful with the 10-year rule. Under the SECURE Act, most non-spouse beneficiaries (such as your adult children) must empty an inherited IRA within 10 years. By using a QTIP, you ensure the money lasts for your spouse's lifetime first, then the 10-year clock starts for your children once the spouse passes.

Is a QTIP right for you?

A QTIP trust is more expensive to set up and maintain than simply transferring assets by a will or beneficiary designation. You'll need an independent trustee to handle the annual trust tax returns and income distributions.

However, if you have significant assets in an IRA and want to ensure your children from an earlier marriage are protected without leaving your surviving spouse empty-handed, it's often the best solution.

With proper planning, you can provide for your surviving spouse and ensure your assets ultimately pass to your children.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Mike Palmer has over 25 years of experience helping successful people make smart decisions about money. He is a graduate of the University of North Carolina at Chapel Hill and is a CERTIFIED FINANCIAL PLANNER® professional. Mr. Palmer is a member of several professional organizations, including the National Association of Personal Financial Advisors (NAPFA) and past member of the TIAA-CREF Board of Advisors.