What Is a Qualified Terminable Interest Property (QTIP) Trust?

A qualified terminable interest property (QTIP) 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.

Key Takeaways

  • A qualified terminable interest property (QTIP) trust allows an individual, called the grantor, to leave assets for a surviving spouse and also determine how the trust's assets are split up after the surviving spouse dies.
  • Under a QTIP, income is paid to a surviving spouse, while the balance of the funds is held in trust until that spouse's death, at which point it is then paid out to the beneficiaries specified by the grantor. 
  • QTIP trusts are put to use in estate planning and are especially useful when beneficiaries exist from a previous marriage but the grantor dies before a subsequent spouse does.
  • With a QTIP, estate tax is not assessed at the point of the first spouse's death, but is instead determined after the second spouse has passed.

How Qualified Terminable Interest Property Trusts Work

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 the power of appointment over the principal. This can prevent these assets from transferring to the living spouse’s new spouse, should she remarry.

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.

Qualified Terminable Interest Property 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.

In a marital gift trust, the estate is split in two, with one section put in a trust fund and the second given directly to the surviving spouse; just like with a QTIP, there is no estate tax charged against either share, but unlike with a QTIP, the surviving spouse can typically appoint beneficiaries of the trust following their death.

Spousal Payments and QTIPs

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.