What Is a QTIP Trust?

What is a QTIP trust (Qualified Terminable Interest Property trust)? A QTIP trust serves two basic purposes.

For one, it allows the trust-maker to place strings on the property distributed within the trust. This can be useful for those in second marriages who want to make sure that their former spouse and their children with their former spouse are provided for.

Secondly, it allows the trust-maker to set a cap on how much of the property is distributed from the trust for the purposes of estate planning. This can help high-asset couples avoid estate taxes that they would otherwise incur without the trust’s help.

How a QTIP Trust Controls Property

Both spouses can set up QTIP trusts and leave assets to the other. When one spouse passes, the surviving spouse gets what’s known as a “life estate”. The survivor is thus entitled to any income that the trust produces and, if there’s real estate held in the trust, they would have the right to use it.

While the surviving spouse is the beneficiary, they do not have full ownership of the property held within the trust. They cannot sell the assets or even give them away. The assets held within the trust are considered property of the trust. This has certain benefits when it comes to tax liability.

When the surviving spouse passes, the trust assets are distributed to a final beneficiary named in the trust. As an example, children from a previous marriage are often named as final beneficiaries in QTIP trusts.

How a QTIP Trusts Defers Estate Taxes

QTIP trusts defer estate taxes, they don’t eliminate them. The estate taxes are paid when the final beneficiary has the trust’s assets dispersed. No estate tax would be due to the surviving spouse since the assets held within the trust are still considered property of the trust. However, when the assets are distributed to the final beneficiary, any assets over the exemption would be subject to estate taxes.

In fact, QTIP trusts rely on the unlimited marital exemption concerning property passed from one spouse to another. Since property passed through death between spouses is not taxable, the first passing of property between a deceased spouse and their living heir would be automatically tax free. However, the trust allows you as the trust-maker some control over how the assets are used and whether or not they can be sold.

Since the trust uses a federal exemption, it only applies to spouses who are both U.S. citizens. Those who want to leave property to a foreign national with whom they are married can use a QDOT trust instead.

What Are the Benefits of a QTIP Trust?

Part of the reason why QTIP trusts are so popular is due to the flexibility they afford. They not only allow spouses to provide for their spouse after they pass, but they also protect their assets for future generations. Another key feature is that QTIP trusts offer flexibility directly after you pass. The executor of your estate is authorized to place assets within the trust by a process known as a QTIP election. In other words, they can put some or all of a deceased spouse’s assets into a QTIP trust.

If you have high-asset estates or rapidly appreciation assets, there can be a remarkable amount of uncertainty when it comes to estate taxes and other matters. A QTIP trust provides a pivot-point if your estate’s value is high enough to incur estate taxes. They allow the executor to make a decision concerning what assets will be held in the trust and what assets can transfer via the marital exemption. In so doing, QTIP trusts can minimize the total amount of estate taxes paid while ensuring that your heirs get as much of your assets as possible.