The purpose of a QTIP trust (Qualified Terminable Interest Property Trusts) is, at its most basic, to secure assets for an individual (most often a child or children) while having at least a portion those assets available to a surviving spouse while simultaneously preserving the marital deduction for estate tax purposes.
Though an important and very useful planning tool, it is not without its potential issues.
As illustrated in this recent Forbes.com article: Not Like the Brady Bunch, it is possible that there may be issues between the children in blended families when the recipient spouse of a QTIP trust passes away. The conflict can arise in determining what estate should be on the hook for the estate taxes.
Example:
Jim and Jane are married and both have children from a previous marriage.
Both provide for a created of a QTIP on their death for the benefit of their own children.
If Jim dies first, certain property/assets are placed into the QTIP and Jane lives of the interest and a certain amount of principle for her life, and on her death the remaining amount goes to Jim's children. This trust arrangement qualifies under the marital deduction and is not taxed on Jim's death.
However, when Jane dies, those remaining amounts are taxed to her estate. Jane's children may have issues with their mother's estate paying taxes on funds distributed to Jim's children, especially when those funds were passed into their mother's estate tax free on Jim's death.
Thankfully, there drafting tools available to clearly spell out this type of liability and avoid conflict between the families.
