Qualified Terminable Interest Property (QTIP) Trust

A qualified terminable interest property, or QTIP, trust lets a person control where their assets ultimately go if their spouse outlives them. When the first spouse dies, the trust supports the surviving spouse; when the surviving spouse dies, the remaining assets go solely to the first spouse’s chosen beneficiaries.

QTIPs are estate planning tools that couples can use for two primary purposes: to protect certain beneficiaries financially if a surviving spouse remarries or has other children, and to reduce estate taxes (though estate taxes typically apply to large estates only).^[0]

QTIP trusts are a type of testamentary trust, which means they take effect once the grantor — the creator of the trust — dies. The income the surviving spouse gets from the trust generally isn’t subject to estate tax. They’re also irrevocable, meaning they can’t be changed after they’re signed and funded.

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QTIPs have three main jobs.

1. Financial security for surviving spouses

QTIP trusts provide income to a surviving spouse for life while preserving the rest of the inheritance for the grantor’s original beneficiaries (usually children from a previous marriage). Both spouses can create QTIP trusts, though only one will take effect for the surviving spouse.

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2. Estate tax reduction for high net worth couples

QTIP trusts qualify for the IRS marital estate tax deduction, which allows the surviving spouse to receive assets without paying federal estate taxes. The estate tax is assessed (if the estate is large enough to trigger estate tax in the first place) after the second spouse dies.The federal estate tax ranges from rates of 18% to 40% and generally only applies to assets over $12.92 million in 2023 or $13.61 million in 2024.

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3. Certainty

Because a QTIP trust is irrevocable, the surviving spouse can’t change the amount they receive or take the principal out of the trust and give it to other people. Generally, the surviving spouse receives the interest earned on the assets in the trust only; they usually will also have access to any houses or property in the trust, but they won’t be able to sell the property. The principal and property ownership are reserved for the first spouse’s intended beneficiaries.

To create a QTIP trust, you’ll make a QTIP election on IRS estate tax return form 706. List the chosen assets (called the “qualified terminable interest property”) and their value on Part A of Schedule M.

There are a few requirements:

• The surviving spouse must be a U.S. citizen. If they are not, you might be able to set up a ​​Qualified Domestic Trust instead. ^[0]

  IRS.gov. Instructions for Form 706. Accessed May 15, 2023.

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• The surviving spouse must receive income from the QTIP trust at least once a year.

• You must appoint a trustee to manage the trust. The trustee can be a family member, attorney or other trusted person. Due to the purpose of a QTIP trust, it’s best if this person isn't your spouse.

• If the assets in the trust aren’t generating income, the surviving spouse has the right to require the trustee to convert them into “profitable property” (i.e., something that does produce income).

The main difference between a QTIP trust and a grantor-retained annuity trust, or GRAT, is who inherits the assets and when. A GRAT is an irrevocable trust in which the grantor puts assets into a trust that pays an annuity back to the grantor.

When the grantor dies, the GRAT’s assets and capital gains go to the beneficiaries. Because the trust is irrevocable, it’s technically not part of the grantor’s estate and so the grantor’s death typically doesn’t trigger estate tax (if one is warranted).

The main difference between a QTIP and a marital trust is when non-spouse beneficiaries inherit the assets. A marital trust divides assets between a surviving spouse and other beneficiaries (usually children) when the grantor dies.