Understanding Estate Taxes
11. QTIP trust
What if the net value of your assets is more than $2 million? One thing you can do is add another provision to your living trust.
For example, let's say Bob and Sue's net estate is $3 million. Again, Bob dies first when the estate tax exemption is $1 million, and the estate is split in half. This time, only $1 million of Bob's half stays in Bob's trust, because that's the amount of the estate tax exemption when he dies. The rest of his half -- $500,000 -- goes into another trust, shown on the far right. This trust is called a QTIP. QTIP stands for "qualified terminable interest property."
Estate taxes on the assets in the QTIP are delayed until the second spouse dies. So, now, both of Bob's trusts can provide income and, if needed, principal for Sue's health, education, maintenance and welfare. (This is Sue's "qualified interest in Bob's property.") When Sue dies, the assets in both of Bob's trusts will go to the beneficiaries he has named. So Sue's interest in Bob's property "terminates" when she dies.
Depending on how much longer Sue lives, adding a QTIP may also save estate taxes. Estate taxes will only be due when Sue dies if the combined value of Sue's trust and Bob's QTIP are more than the estate tax exemption in effect at that time.
If you currently have this planning in your will or trust, it would be a good idea to have it reviewed by your attorney. That's because if you have beneficiaries other than your spouse and you die while there is no estate tax in 2010, your spouse could receive fewer resources than you had intended.