What is a Qualified Terminable Interest Property (QTIP)
Trust?
A qualified terminable interest property (QTIP) trust can be created during life or upon death of a grantor (creator of the trust) with the intent to provide for their spouse, or surviving spouse, but also to maintain control of how the trust’s assets are distributed after the surviving spouse’s death. This type of trust will guarantee that the terms that were set up will be enforced through the trust’s entire life. Commonly, a QTIP trust is set up for couples who have children from prior marriages and desire to leave assets to those children and grandchildren (remainder beneficiaries) after the surviving spouse passes away.
Requirements of a qualified terminable interest property trust:
- All trust accounting income is payable to the spouse/surviving spouse, at least annually for their life.
- During the lifetime of the recipient spouse, no one has a power to appoint or distribute the trust assets to anyone other than that spouse.
- To qualify for the marital deduction, if the a QTIP trust is created during lifetime, a federal gift tax return must be timely filed. And, if created at death, an election must be made on a timely filed estate tax return.
- The spouse or surviving spouse must be a US citizen.
Advantages of a qualified terminable interest property trust:
- Trust property passing to the spouse or surviving spouse qualifies for the marital deduction, if all the proper steps are taken, and will not be included in the estate of the grantor spouse at their death.
- The trust assets will receive a step up in basis upon the surviving spouse’s death, which in some instances, may result in income taxes being reduced when disposed of in the future due to less time to appreciate.
- If effective upon the first spouse to die, the surviving spouse can have access to the income which can help ensure that they are able to maintain the same standard of living as before the deceased spouse’s death.
- Trust property passing to the spouse or surviving spouse qualifies for the marital deduction, if all the proper steps are taken, and will not be included in the estate of the grantor spouse at their death.
Disadvantages of a qualified terminable interest property trust:
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- It is always possible for disagreements to arise between the surviving spouse and the remainder beneficiaries. These conflicts will commonly be centered around how the assets are invested and if the strategies are geared towards higher income potential, benefiting the surviving spouse, or methods to increase principal eventually benefiting the remainder beneficiaries.
- Depending on the structure of the trust documents, the surviving spouse may have limited access to the principal.
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When setting up an estate plan, because each couple’s family dynamics and financial situation is different, a qualified terminable interest property trust is just one type of trust to consider. Having the guidance of a professional to help you think about all the options is essential to ensure you feel comfortable with your estate plan. Boulay’s advisors are experienced in this area and can help you and your family with this and any other estate and trust planning needs—connect with us to learn more.