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A Guide to Qualified Terminable Interest Property Trusts (QTIP Trusts)

What does "qualified terminable interest property trust" mean? And who is this type of trust best for? Learn everything you need to know about QTIP trusts.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Qualified Terminable Interest Property (QTIP) Trusts are a savvy estate planning tool that allows a Grantor (the person who created the Trust) to protect the future of his or her spouse, children and future legacy. Learn everything you need to know about the powerful QTIP Trust in this guide.

What is a QTIP Trust?

A Qualified Terminable Interest Property (QTIP) Trust sets aside resources for a surviving spouse. With a QTIP, you don't lose control over what happens to the funds if the spouse named in the agreement passes away. Typically, your spouse receives income for the rest of his or her life.

The person who sets up the QTIP - also known as the Grantor - can make sure the surviving spouse has the resources they need to live. Under this type of Trust, income made on the QTIP will automatically pass to the remaining spouse. One major benefit with a QTIP is the balance, (or principal) remains protected until the surviving spouse also passes away. At this point, other named beneficiaries, often your children or other family members, will then receive any remaining assets in the Trust.  

QTIPs are an effective estate planning tool that allows Grantors to provide for spouses - for example, in the case of a second marriage - without putting other beneficiaries at risk. By strictly limiting the distribution to the interest gained on the Trust, QTIPs protect and ensure that other beneficiaries inherit the balance once a surviving spouse also passes away.

How Does a QTIP Trust Work?

While it primarily functions to provide income to a surviving spouse, a QTIP also has tax advantages as well, since it limits gift and death taxes. This type of Trust allows you to maintain control over money and assets placed in the Trust. If your spouse isn't as finance-savvy, this can ensure they receive a set income without impacting the principal in the fund.

The living spouse has no control over the principle and cannot change the terms of distribution. This prevents them from drawing additional money out and, say, giving it to a new spouse or other family members.

The assets in a QTIP enjoy protection from taxation since it falls under marital deductions. However, money within the Trust does become subject to taxation when the second spouse passes. The liability for these taxes will simply fall to other named beneficiaries, such as children or other relatives.

Who Can be Trustee of QTIP Trust?

If you’re the Grantor of a QTIP, you’ll have to appoint at least one Trustee. The Trustee is the person or organization you name to manage the Trust. This Trustee is charged with controlling how assets inside a Trust are handled - everything from managing investments, to filing taxes, to one day distributing the Trust assets to final beneficiaries falls to the Trustee to handle. Therefore, many people choose a financial institution, attorney or trusted family member to fill the role. You can also name your surviving spouse as a Trustee. However, keep in mind that will give them broad access to the assets in the Trust, which may defeat the purpose of setting up a QTIP at all.

QTIP Trust Requirements - What Are the Requirements of a QTIP Trust? 

There are a few requirements when it comes to setting up a QTIP Trust, including:

  • You must set up the QTIP as an Irrevocable Trust - meaning it cannot be changed

  • The living spouse must be a U.S. citizen

  • The living spouse must receive income at least once a year

  • Your surviving spouse has the right to require the fund manager to convert non-income generating principal into profitable property

  • There can be no other beneficiaries while the surviving spouse lives

When Should a QTIP Trust Be Used?

Before deciding on a QTIP, it may be helpful to compare them to other types of Trusts. QTIP Trusts provide tax shelter not only for the estate but also for the surviving spouse. They’re also more widely available than some other types of Trusts. For example, Credit Shelter Trusts provide tax advantages but are out of reach for all but the very affluent.

  • QTIPs vs Revocable Trusts: As an Irrevocable Trust, the QTIP Trust gives the Grantor unprecedented control over their estate. With a Revocable Trust, beneficiaries have greater control over how assets and resources are dispersed.

  • QTIPs vs Marital Trusts: Because the surviving spouse cannot choose different beneficiaries, the QTIP protects final beneficiaries, which are most often children, other close family members and friends, or charities. This is more rigid than a Marital Trust which gives the surviving spouse control over the inherited assets.

  • QTIPs vs. Asset Protection Trusts: can also be more appropriate than Asset Protection Trusts, which shelter your estate from creditors, but not from the poor judgment or life changes a surviving spouse makes after the first spouse passes away.

When your primary interest is protecting your surviving spouse without putting final beneficiaries at risk, a QTIP may serve your needs the best.

What is the Difference Between QTIP Trust vs Marital Trust

QTIP Trusts and Marital Trusts have some similarities, but they actually operate quite differently. For example, a QTIP only gives your living spouse access to income generated from the Trust. This can be an ideal option for surviving spouses who haven't demonstrated fiscal responsibility. Additionally, while a QTIP provides an income for a surviving spouse, it also protects children and other final beneficiaries. As noted, final beneficiaries receive the balance of the Trust when the surviving spouse dies.

By contrast, a Marital Trust distributes some assets to the surviving spouse and disperses any remaining assets to final beneficiaries. In a Marital Trust, the estate is essentially divided between a surviving spouse and other beneficiaries, without depending on the death of the surviving spouse.

Do I Need a QTIP Trust?

If you or your spouse have children and either one of you has remarried, a QTIP can provide an income to the spouse specified in the Trust. It also ensures that your children will receive the balance of the funds once the remaining spouse passes away.

This type of Trust allows you to ensure that at least a portion of your estate passes to future generations. It also can help you minimize estate taxes and protect your loved ones from future spouses (second marriages), as well as offering protection from creditors. Therefore, it can be an ideal estate planning solution for anyone interested in leaving behind a lasting legacy.

Set Up Your QTIP Trust Today

Setting up your QTIP is simple, but you need to be smart about it. If you’re looking for something that will protect your spouse and final beneficiaries, and you want to ensure that there are strict measures in place about how Trust assets are handled, a QTIP may be the right move for you. But remember that for full asset protection and to get the most out of your QTIP Trust, there are specific tax rules that need to be addressed. Be sure you’re creating the exact Trust you need. 

Learn more about the types of Trusts you can create with Trust & Will - an online estate planning tool that offers affordable, effective estate planning to everyone. Documents are prepared by trusted estate planning experts, so you can trust you’re setting up the perfect plan to protect your estate and your loved ones, both now and in the future. 

Don’t put off today what could make a world of difference for those you love most in life tomorrow. Reach out to Trust & Will today and create your Trust so you can rest easy knowing that your estate is set up for the future. 

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