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Home > Services > Domestic Wealth Planning > Qualified Plans - IRA strategies > QTIP/IRA Formula
The Qualified Plan QTIP Formula is a recommended format for use in a living trust created by any married taxpayer who has (i) significant funds in an IRA [and §401(k) accounts] and (ii) concern about the administration, distribution, and control of any unused portion of the account(s) after his decease.
A married IRA owner may want to benefit his spouse with his IRA, if he predeceases her, yet maintain sufficient post-mortem control of the account so that all unused portions will be properly transferred to his children (or other beneficiaries) upon spouse's decease.
Using this strategy, the married IRA owner can also elect to have a (spousal) Credit Shelter Trust funded with only after-tax dollars instead of IRA funds. That avoids the potential problem of not maximizing his unified credit if the Credit Shelter Trust were the only beneficiary of the IRA [since portions of income must always be used to satisfy the IRC §401(a)(9) minimum required distribution (MRD) amounts].
How It Works...
In addition to the control benefit for the account owner, the Qualified Plan/IRA QTIP Formula gives the surviving spouse withdrawal rights over all income earned in the IRA for that current year, which it must do in order to qualify for the marital deduction. However, the terms of the trust do not require the annual income withdrawal amounts to exceed the §401 minimum required distribution amounts per Rev. Ruling 2000-2, while it (QTIP Trust) still qualifies for the marital deduction.
This special QTIP Trust format creates the possibility of having a certain amount of tax-deferred income stay and accrue in the IRA even though the spouse is the effective beneficiary and receiving MRD amounts each year. Over time, such a strategy can prove to be financially prudent.
A secondary feature incorporated with this strategy is a two-part Credit Shelter Trust format consisting of a Spousal Trust Fund and a Non-spousal Trust Fund. As with the Spousal Trust, the Non-spousal Trust (which provides no spousal benefits) can be named as a designated beneficiary of part (or even all) of the IRA.
The Non-spousal Trust Fund enables the younger ages of the IRA owner's children (rather than the spouse's age) to be used for minimum distribution purposes. That would normally equate to much greater deferred accumulation periods inside the account provided that the owner's trust stipulates multiple age-based allocation terms.
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