By: Randall A. Denha, Esq.
A lifetime qualified terminable interest property (” Lifetime QTIP”) trust is a valuable estate planning tool that offers tax and non-tax benefits to married couples. As an alternative to an outright gift to a spouse, these trusts can be an effective way to equalize estates in order to save gift and estate taxes and to maximize creditor protection for the donor, donee spouse, and their children, while allowing the donor to control the ultimate disposition of trust assets.
The Michigan Trust Code and an amendment to the Michigan Statute of Frauds now provide that a Lifetime QTIP can be drafted and receive some of the same creditor protection benefits that our sister states like Delaware, Nevada and Alaska, provide, to name a few. Of course, this Michigan law does not create an Asset Protection trust but provides several benefits, one of which is creditor protection. In summary, the new law provides that certain transfers are not considered “void” as against creditors, whether existing or subsequent, of the transferee. This is welcome news and here’s why: In a typical Lifetime QTIP structure, the wealthier spouse transfers assets to his/her spouse in trust for the lifetime of the donee spouse. The donee spouse must receive all of the trust income (at least as frequently as annually). The donee spouse can also receive trust principal for health, maintenance and support (although this is not mandatory.) Upon the death of the donee spouse, the assets continue in trust for the benefit of the wealthier spouse. The trust can provide the wealthier spouse with income and principal as needed, while protecting the wealthier spouse from the claims of creditors. However, the wealthier spouse should not serve as sole Trustee of the trust. Instead, an independent Co-Trustee should have discretionary authority over all distributions of income or principal to the wealthier spouse. A Lifetime QTIP Trust creates an almost bullet proof plan.
Of course, depending on the viewpoint of the donor spouse, outright spousal gifts can have perceived disadvantages (especially in second marriages.) These disadvantages may include the fact that:
- The donee spouse has complete control over the gifted property, including the ability to spend or re-gift the funds;
- The donee spouse controls the ultimate disposition of any gifted funds held by the donee spouse at his or her death; and
- Gifted assets are subject to claims of the donee spouse’s creditors.
The lifetime QTIP trust is a vehicle that can be used by a donor who wants to:
- Make nontaxable completed gifts for estate equalization and/or creditor protection purposes;
- Restrict the donee spouse’s control over the gifted property;
- Control the disposition of any property remaining at the donee spouse’s death; and
- Provide protection from future claims of the donee spouse’s creditors.
To learn more about the Lifetime QTIP and how may benefit from it, please do not hesitate to contact us.