A qualified terminable interest property (QTIP) trust enables the grantor to provide for a surviving spouse and maintain control of how the trust’s assets are distributed once the surviving spouse dies. Income generated from the trust, and sometimes the principal, is given to the surviving spouse to ensure that the spouse is taken care of for the rest of their life.
KEY TAKEAWAYS
- A qualified terminable interest property (QTIP) trust allows an individual, called the grantor, to leave assets for a surviving spouse and determine how the trust’s assets are split up after the surviving spouse dies.
- Under a QTIP trust, income is paid to a surviving spouse while the balance of the funds is held in trust until that spouse’s death. At that point, the remainder is paid to the beneficiaries specified by the grantor.
- QTIP trusts are used in estate planning and are especially helpful when beneficiaries exist from a previous marriage, but the grantor dies before a subsequent spouse does.
- In QTIP trust, estate tax is not assessed at the point of the first spouse’s death but is determined after the second spouse has passed.
- A QTIP trust is established by making a QTIP trust election on the executor’s tax return.
How Qualified Terminable Interest Property (QTIP) Trusts Work
This type of irrevocable trust is commonly used by individuals who have children from another marriage. QTIP trusts enable the grantor to look after their spouse and ensure that the assets from the trust are passed on after that spouse dies to beneficiaries of their choice. Beneficiaries could be children from the grantor’s first marriage, other family members, or friends.
Aside from providing the living spouse with a source of funds, a QTIP trust can also help limit applicable death and gift taxes. The property within the QTIP trust providing income to a surviving spouse qualifies for marital deductions, meaning the value of the trust is not taxable after the first spouse’s death. Instead, the property becomes taxable after the second spouse’s death, with liability transferring to the named beneficiaries of the assets within the trust.
Additionally, QTIPs can assert control over how the funds are handled should the surviving spouse die, as the spouse never assumes the power of appointment over the principal. This can prevent these assets from transferring to the living spouse’s new spouse should they remarry.
- QTIP trusts are reported on tax returns using IRD Form 706.1
Qualified Terminable Interest Property Trustee Appointments
A minimum of one trustee must be appointed to manage the trust, though there may be multiple named simultaneously. The trustee or trustees will be responsible for controlling the trust and have authority over the management of the assets.
Examples of possible trustees include, but are not limited to, the surviving spouse, a financial institution, an attorney, and other family members or friends.
Spousal Payments and QTIP Trusts
The surviving spouse named within a QTIP trust typically receives payments from the trust based on the income the trust generates, similar to stock dividends. Payments can be made from the principal if the grantor allows it when the trust is created.
Payments will be made to the spouse for the rest of their life. Upon death, the payments cease, as they are not transferable to another person. The assets in the trust then become the property of the listed beneficiaries.
QTIP Trust vs. Marital Trust
| QTIP | Marital Trust |
|---|---|
| Irrevocable | Irrevocable |
| Only names the spouse as beneficiary | Only names the spouse as beneficiary |
| Unlimited marital deduction | Unlimited marital deduction |
| Defers taxes until spouse’s death | Defers taxes until spouse’s death |
| Control does not pass to spouse | Control passes to spouse |
| Income from assets or principal paid to spouse | Surviving spouse controls asset distribution |
Each type of trust can help you achieve similar estate planning goals. However, the key differences lie in how the assets in the trust are controlled. For example, a QTIP lets the grantor dictate how assets within the trust are distributed to their spouse and requires that distributions be made at least annually.
A marital trust allows the surviving spouse to dictate how the assets are distributed—it doesn’t require distributions, and that spouse can even add new beneficiaries. A marital trust has more flexibility as this type does not require the surviving spouse to take annual distributions. The surviving spouse of a marital gift trust can also appoint new beneficiaries following the death of the original grantor.
Benefits of a QTIP
While QTIPs are similar to marital trusts, there are benefits in certain situations.
- You control where the assets end up: You control who your assets pass to after both you and your spouse die. This means that no matter what your spouse does after you pass on, any assets left in the trust are passed on to the secondary beneficiaries you name. These could be your children, grandchildren, or children from a previous marriage.
- QTIPs protect all assets and income: As your spouse ages, they may be unable to make the sound financial decisions they once could. Dictating how income or principal is distributed and used protects the assets for all beneficiaries you name. Your assets cannot be accessed by thieves, or scammers, be accidentally signed away or be used in ways you didn’t intend for them to be used.
How Does a QTIP Trust Work?
A QTIP trust is an irrevocable trust that pays income generated from the assets to a spouse. When that spouse dies, the assets pass to the beneficiaries named by the grantor.
What Is the Difference Between a QTIP and Marital Trust?
The two are similar, except that a QTIP cannot be changed by the surviving spouse and requires that at least one annual distribution occur.
What Are the Requirements of a QTIP Trust?
A QTIP is required to pay all of its income to the spouse beneficiary. There can also be no other beneficiaries until that spouse passes away.
The Bottom Line
Qualified Terminable Interest Trusts are designed to be a method of ensuring you can leave assets to your spouse and other named beneficiaries while the terms you want are enforced throughout the trust’s existence.
QTIPs may not be suitable for everyone or every situation. For example, if you’re not concerned with how your estate is distributed after your spouse dies, you might not need a QTIP. But if you’re leaving an estate to your spouse when you die and want any remaining assets and income to go to specific people after your spouse passes on, a QTIP is an excellent way to ensure your wishes are followed.
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What is a QTIP trust and how does it work?
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