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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).
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.
Pros and cons of a QTIP trust
Provides for a surviving spouse. QTIPs ensure a spouse continues to have income for life.
Irrevocable. QTIP trusts can’t be changed, which can be a drawback if your family or financial situation changes significantly.
Protects inheritance for beneficiaries. QTIP trusts preserve assets for the grantor’s children, even if the surviving spouse remarries or has children from a previous relationship.
Can be complex for the trustee to manage. The trustee of the estate must file tax documents accordingly and manage the assets according to the grantor’s wishes.
May reduce estate tax. This trust delays estate tax until the second spouse dies because it qualifies for the marital tax deduction.
Restrictive. This may be a benefit in some cases, but a QTIP trust limits the surviving spouse to the income of the trust assets; it doesn’t allow them access to the principal.
What is the purpose of a QTIP trust?
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.
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 $12.06 million in 2022 or $12.92 million in 2023.
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.
How do you set up a QTIP trust?
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.
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).
QTIP trust vs. Grantor retained annuity trust
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).
QTIP trust vs. marital trust
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.
A QTIP trust, on the other hand, only passes assets to final beneficiaries once the surviving spouse dies. Also, a marital trust gives the surviving spouse more control over a portion of the assets; a QTIP trust typically restricts the surviving spouse to the income generated from the assets.