What is a 'Qualified Terminable Interest Property (QTIP) Trust'

A qualified terminable interest property 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, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that the spouse is taken care of for the rest of their life.

BREAKING DOWN 'Qualified Terminable Interest Property (QTIP) Trust'

This type of irrevocable trust is commonly used by individuals who have children from another marriage. QTIPs enable the grantor to look after his current spouse and make sure that the assets from the trust are then passed on to beneficiaries of his choice, such as the children from the grantor's first marriage.

Aside from providing the living spouse with a source of funds, a QTIP can also help limit applicable death and gift taxes. Additionally, it can assert control over how the funds are handled should the surviving spouse die, as the spouse never assumes power of appointment over the principal. This can prevent these assets from transferring to the living spouse’s new spouse, should she remarry.

Qualified Terminable Interest Property (QTIP) Trustee Appointments

A minimum of one trustee must be appointed to manage the trust, though multiple individuals or organizations may be named simultaneously. The trustee or trustees will be responsible for controlling the trust and will also have authority over how its assets are managed. 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

The surviving spouse named within a QTIP receives payments from the trust based on the income the trust generates, similar to the issuance of stock dividends. As the surviving spouse is never the true owner of the property, a lien cannot be put against the property within the trust or the trust itself. 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.

Qualified Terminable Interest Property and Taxation

The property within the QTIP providing funds 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.

RELATED TERMS
  1. Unlimited Marital Deduction

    The unlimited marital deduction is a provision that allows an ...
  2. Authorized Investment

    Authorized investments are those that are permitted within a ...
  3. Alimony Substitution Trust

    An alimony substitution trust is an agreement in which a divorced ...
  4. Irrevocable Trust

    An irrevocable trust cannot be modified, amended or terminated ...
  5. Revocable Trust

    A revocable trust is a trust whereby provisions can be altered ...
  6. Disclaimer Trust

    A disclaimer trust is one that has embedded provisions that allow ...
Related Articles
  1. Managing Wealth

    Pick the Perfect Trust

    Trusts are an estate plan's anchor, but the terminology can be confusing. We cut through the clutter.
  2. Retirement

    Estate Planning: Unlimited Marital Deductions

    The unlimited marital deduction allows for the transfer of assets to a surviving spouse without being subject to estate tax.
  3. Retirement

    Estate Planning for Beginners, Part Six

    Credit shelter trusts can be an income tax planning tool for the survivors named as beneficiaries.
  4. Retirement

    Why It's So Important to Update Your Estate Plan

    As rules and exemptions tied to the estate tax change, so should your estate plan. Here's why updating it is so important.
  5. Retirement

    Retirement Planning for the Non-Employed Spouse

    A stay-at-home spouse probably racks up more hours working than any office jockey. Make sure he or she is set up to save for retirement, as well.
  6. Financial Advisor

    Advisors: Tips for When to Employ Living Trusts

    Revocable living trusts accomplish estate planning objectives that aren't possible with a will. Here are some of the cases that show when to use a trust.
  7. Retirement

    Estate Planning For Canadians

    Trusts, wills, taxes and rules differ by country. Find out what you need to know about estate plans in Canada.
  8. Retirement

    Estate Planning for Beginners: Part Three

    A primary purpose of most trusts is to provide a timetable for the distributions of assets where an outright distribution may not be warranted.
  9. Retirement

    Estate Planning for Beginners, Part Four

    This is how disclaimer trusts work and when it makes sense to use them in an estate plan.
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center