The Benefits of a Q-Tip Trust
An Extra Source of Protection for Your Children
Q-Tip trusts are often used by blendedfamilies where the spouses each have their own children. The first spouse
to pass away can use a Q-Tip to preserve the interests of his or her children
or other intended beneficiaries. Presumably, without legal protection
a surviving spouse could create a will that ignores the children of the
deceased spouse, instead diverting all the assets to his or her own children.
However, the unlimited marital deduction generally is not allowed for property that passes to a spouse for his or her life and then to someone other than the surviving spouse. That could cause a potential estate tax problem for affluent families.
Fortunately, there is an exception for a "qualified terminable interest property" transferred to a trust. If a special election is made, the value of the property may qualify for the marital deduction. The property generally is included in the taxable estate of the surviving spouse.
In the case of a joint and survivor annuity, no amount is included in the donee's estate if he or she dies before the donor.
The election for a Q-Tip is made by the executor of the estate of the first spouse to die. Once the election is made, it is irrevocable.
Note: In some cases, it may actually be beneficial to forgo the Q‑Tip election. That's because the surviving spouse could end up with an unusually large estate. So the overall estate tax bill to the children may be greater than it would have been without the Q‑Tip election. Thus, it helps to designate an executor who is qualified to make these complex decisions.
Consult with your attorney about whether this trust would be beneficial in your situation.