A Guide to Complex Trusts

Introduction

Trusts can be a key component of an estate plan. Some are designed with a simple, straightforward purpose in mind. Want your estate to be able to avoid the probate process? There's a basic trust used for that: a Revocable Living Trust. Is there a possibility that one of your beneficiaries may be under 18 at the time they inherit from you? There's a simple solution for that, too: a Contingent Trust for Minors.

Other trusts are designed to take on more complex issues, such as estate taxes, blended families or beneficiaries with special needs. To address advanced estate planning issues, complex trusts are sometimes required. This guide provides an overview of a few of the most common "complicated" trusts used in estate planning.

Qualified Terminable Interest Property (QTIP) Trusts

Estate planning for blended families, where both spouses have children from prior relationships, can present some unique challenges. One of the primary concerns is to be able to provide for the financial support of the surviving spouse, while at the same time ensuring that the children of the first deceased spouse are able to receive their inheritance after the surviving spouse’s death. 

With a typical will or living trust, after the death of the first spouse, it’s possible for the surviving spouse to change his or her estate plan to alter the way that the couple’s property will (or won’t) be left to their respective children. Qualified Terminable Interest Property Trusts (QTIP Trusts) can address this concern.

How It Works

With a QTIP trust, the surviving spouse receives a steady stream of income from the trust during his or her lifetime and has a right to distributions of the trust’s assets in many situations. Upon the death of the surviving spouse, the remaining assets are distributed to the first deceased spouse’s children. QTIP trusts are irrevocable, meaning that the provisions of the QTIP trust generally cannot be altered later on.¹

_{¹IRC Section 2056(b); https://www.irs.gov/pub/irs-drop/rr-00-2.pdf}

Trustee Considerations

Designating the trustee for a QTIP trust can be a complex decision on its own and requires careful consideration of family and interpersonal dynamics. There is inherent tension created by the arrangement: the fewer assets spent by the surviving spouse, the more that remains for the deceased spouse’s children to inherit. In some cases, designating either the surviving spouse or the deceased spouse’s adult children as trustees of a QTIP trust can exacerbate conflict.
 
To minimize potential conflicts, it can sometimes be helpful to designate the surviving spouse and the deceased spouse’s adult children as co-trustees of the QTIP trust. However, every family is different, and in other situations, this type of designation might actually increase the likelihood of problems.
 
Other possible solutions include designating another family member, a family friend or a professional trustee to act either as sole trustee or as a co-trustee. Trust companies, private banks and certain brokerage houses are the most common choices for a professional trustee. CPAs and attorneys may also be willing to act in this capacity.