A Qualified Terminable Interest Property Trust is a type of trust used in estate planning to allow a grantor, the person making the trust, to provide his surviving spouse with income for life, while still controlling the ultimate disposition of his property upon the death of his surviving spouse. While the transfer of a terminable interest in property would not otherwise qualify for the unlimited marital deduction, a QTIP trust allows a terminable interest to be passed to the surviving spouse and still qualify for the unlimited marital deduction if the executor files an election on the grantor’s death tax return.
A QTIP trust is used more frequently in second or subsequent marriages, such as when the new spouse becomes a stepparent to the grantor's children. In this scenario, the grantor may want to provide income for life to the new husband or wife, but still control how trust assets are distributed, such as to his children from a prior marriage.
In a QTIP trust, the surviving spouse generally is not given a power of appointment. The QTIP trust is basically an AB Trust but more restrictive because the surviving spouse is not given control over how the grantor’s property is distributed upon death of the surviving spouse.
A QTIP trust only makes sense in certain situations. Before creating a QTIP trust, consult a tax advisor or estate planning attorney. A QTIP trust should only be made after consideration of your entire estate, along with your spouse's estate, a clear understanding of the spousal share, and your overall objectives for distributing your property.
Other Estate Planning Trusts
For information about other types of trusts used in estate planning, see More About Trusts.
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Advantages of a QTIP Trust
A qualified terminable interest property trust offers two primary advantages to a married person:
A QTIP trust allows a spouse to provide his surviving spouse with income for life, while still ensuring his children or other desired beneficiaries inherit his property when his surviving spouse dies; and
A QTIP trust gives an executor or personal representative the flexibility to make an election to qualify for the unlimited marital deduction if making such an election is beneficial for estate tax purposes, when the surviving spouse is receiving only a life estate in the deceased spouse's property.
How Does a QTIP Trust Work?
In a qualified terminable interest property trust, a married person places property in trust and names his surviving spouse as the life beneficiary of the income from the trust. The married person names final beneficiaries of the trust, such as his children, grandchildren, charitable organizations or other beneficiaries, who are to receive the property in the trust, called the remainder, when his surviving spouse dies.
Income from the QTIP trust must be paid to the surviving spouse at least once per year during the surviving spouse’s lifetime. If the married person creating the trust wants the surviving spouse to have the right to invade the trust principal for certain reasons, that right can be included in the trust agreement. After the surviving spouse passes, the principal of the trust is paid to the final beneficiaries.
Upon death of the first spouse, the surviving spouse has the option of treating the property in the trust as a gift from the deceased spouse, in which case the value of the trust property is included in the surviving spouse’s estate for estate tax purposes.
