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.

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