Legal Definitions - qualified-terminable-interest property

Qualified-terminable-interest property, often referred to by its acronym QTIP property, is a specific type of trust or arrangement used in estate planning, primarily by married couples. It allows a deceased spouse to leave assets to a surviving spouse in a way that qualifies for the unlimited marital deduction (meaning no estate tax is due on those assets at the first spouse's death), while still ensuring that the assets will eventually pass to beneficiaries chosen by the deceased spouse, rather than by the surviving spouse.

Under a QTIP arrangement, the surviving spouse receives all the income from the property for their lifetime. However, they do not have the power to decide who inherits the principal (the main body of the assets) after their death. Instead, the deceased spouse's will or trust specifies the ultimate beneficiaries. When the surviving spouse dies, the QTIP property is included in their estate for estate tax purposes, but it then passes to the beneficiaries originally designated by the first spouse.

Here are some examples to illustrate how qualified-terminable-interest property works:

• Example 1: Blended Family Estate Planning

  A husband has two children from a previous marriage and wants to ensure his current wife is financially secure for her lifetime. However, he also wants to guarantee that his substantial investment portfolio ultimately passes to his children from the first marriage, not to his wife's relatives or a future spouse if she remarries. He establishes a QTIP trust in his will, directing that his investment portfolio be placed into it upon his death.

  How this illustrates QTIP: His wife receives all the income generated by the investment portfolio for the rest of her life, providing her with financial support. She cannot, however, change the beneficiaries of the principal. Upon her death, the entire investment portfolio passes directly to the husband's children from his first marriage, exactly as he specified. This arrangement allows the husband to provide for his wife while maintaining control over the final distribution of his assets to his chosen heirs, and also defers estate taxes on those assets until his wife's death.

• Example 2: Protecting Family Heirlooms

  A woman owns a valuable collection of antique jewelry that has been passed down through her family for generations. She wants her husband to enjoy the use and possession of the jewelry during his lifetime, but she is adamant that after his death, the collection must go to her niece, who shares her passion for antiques. She sets up a QTIP trust for the jewelry collection in her estate plan.

  How this illustrates QTIP: Upon the woman's death, the jewelry collection is placed into the QTIP trust. Her husband has the right to possess, wear, and display the jewelry for the remainder of his life, effectively receiving the "income" or benefit of its use. He cannot sell the collection or designate a different heir for it. When he passes away, the entire antique jewelry collection is transferred directly to the woman's niece, as she originally stipulated. This demonstrates how QTIP can ensure a loved one benefits from property for life while securing its ultimate transfer to a specific, predetermined beneficiary.

• Example 3: Managing Real Estate for Future Generations

  A couple owns a large family farm that they want to keep within their lineage. The first spouse to die wants to ensure the surviving spouse can continue to live on and manage the farm, benefiting from its operations, but ultimately wants the farm to pass to their grandchildren. They decide to use a QTIP trust for the farm.

  How this illustrates QTIP: When the first spouse dies, the farm is transferred into a QTIP trust. The surviving spouse has the right to live on the farm, manage its operations, and receive all profits generated by it for their lifetime. They cannot sell the farm or designate who inherits it. Upon the surviving spouse's death, the farm is then transferred to the couple's grandchildren, as originally specified in the trust. This allows for the continued use and benefit of a significant asset by the surviving spouse while guaranteeing its preservation and transfer to future generations according to the original owner's wishes, all while qualifying for the marital deduction.