Legal Definitions - QTIP trust

A QTIP trust, which stands for Qualified Terminable Interest Property trust, is an estate planning tool primarily used by married individuals to provide for their surviving spouse while maintaining control over the ultimate distribution of their assets after the surviving spouse's death. It also allows for the deferral of estate taxes.

Here's how it generally works:

• The first spouse to die (the "decedent spouse") creates the QTIP trust in their will or living trust.
• The surviving spouse receives all income generated by the trust assets for the remainder of their lifetime. This is known as a "terminable interest" because it ends upon their death.
• Crucially, the decedent spouse, not the surviving spouse, dictates who will ultimately receive the trust's principal (the main assets) after the surviving spouse passes away.
• Assets transferred to a QTIP trust qualify for the unlimited marital deduction, meaning no federal estate tax is due on those assets when the first spouse dies. The estate tax is deferred until the death of the surviving spouse, at which point the trust assets are included in their taxable estate.

This type of trust is particularly useful in situations where the decedent spouse wants to ensure their surviving spouse is financially secure but also wants to guarantee that specific beneficiaries (such as children from a prior marriage or a charity) ultimately inherit the assets.

Here are some examples:

• Blended Family Scenario: John has two children from a previous marriage. He later marries Sarah, who has no children of her own. John wants to ensure Sarah is financially secure for her lifetime but also wants his children to inherit the bulk of his estate. John establishes a QTIP trust in his will, naming Sarah as the income beneficiary for life and his children as the ultimate beneficiaries of the trust's principal. Upon John's death, Sarah receives all income from the trust. When Sarah eventually passes away, the remaining assets in the trust are distributed directly to John's children, as he specified. John's estate also benefits from the marital deduction, deferring estate taxes until Sarah's death.

  This illustrates a QTIP trust because John provides for Sarah's financial well-being during her lifetime (income interest) while ensuring his children from a prior marriage ultimately inherit his assets, maintaining control over the final distribution.

• Protecting Assets and Intentions: Maria is a successful entrepreneur with significant wealth she wishes to eventually pass to her alma mater for a scholarship fund. She is married to David, who is not as financially savvy and has a history of making impulsive financial decisions. Maria wants to ensure David is well-provided for during his lifetime but fears he might mismanage the funds or be unduly influenced if he had outright control. She sets up a QTIP trust, providing David with all income for life, but designating her university as the remainder beneficiary. This arrangement ensures David's financial security without giving him control over the principal, thereby protecting the assets for her charitable goal.

  This demonstrates a QTIP trust's ability to protect assets and fulfill specific long-term intentions. Maria ensures David's support (income interest) while safeguarding the principal for her chosen charity, preventing potential mismanagement or diversion of funds.

• Estate Tax Deferral for Wealthy Couples: Robert and Emily are a very wealthy couple with a large estate, and their primary goal is to minimize estate taxes upon Robert's death while ensuring Emily is fully supported. Robert establishes a QTIP trust, funding it with a substantial portion of his assets. Emily receives all income from the trust for her lifetime. Upon Robert's death, the assets transferred to the QTIP trust qualify for the unlimited marital deduction, meaning no federal estate tax is due on those assets at that time. The estate tax is deferred until Emily's death, at which point the trust assets will be included in her taxable estate. This strategy defers the tax burden and provides Emily with a secure income stream without giving her control over the ultimate disposition of the principal.

  This example highlights the tax deferral benefit of a QTIP trust. Robert's estate avoids immediate estate taxes due to the marital deduction, and Emily receives lifetime income, while the ultimate beneficiaries (which Robert would have designated) receive the principal after Emily's passing.