You create this trust during your lifetime for your spouse. It qualifies for the gift tax marital deduction. The federal estate tax benefit to this technique is that when your spouse dies, the QTIP trust is included in his or her estate for federal estate tax purposes, and if your spouse lacks sufficient assets in his or her own name to use his or her federal estate tax exemption, the QTIP assets will achieve this.
Upon the death of your spouse, if you survive him or her, an amount of assets equal to the estate tax exemption will first go to fund an irrevocable “family” trust created under the LIFETIME QTIP trust for your benefit. The balance of the LIFETIME QTIP trust assets will be allocated to the “marital” trust for your benefit and will qualify for the marital deduction, resulting in no federal estate tax at your spouse’s death.
By structuring the LIFETIME QTIP trust this way, the assets allocated to the “family” trust when your spouse dies will escape estate tax because your spouse’s estate tax exemption “shelters” them from estate tax. They also won’t be subject to federal estate tax when you die, because assets allocated to an irrevocable “family” trust are not part of your estate for federal estate tax purposes.
The LIFETIME QTIP trust also provides creditor protection because the QTIP assets are completely insulated from claims of your creditors and your spouse’s creditor’s during your spouse’s lifetime