top of page
  • Writer's pictureBenjamin Inman

What is a QTIP Trust?

What is It? A Qualified Terminable Interest Property (QTIP) is a type of marital trust that lets the grantor (the entity whose assets are put into the trust) provide for a surviving spouse and maintain control of how the trust’s assets are distributed when the surviving spouse dies.

How does it work? Under a QTIP, income from trust property is paid to a surviving spouse, while the balance/remainder of the funds is held in the trust until that spouse’s death, at which point it is then paid out to the beneficiaries that the grantor has selected. While the surviving spouse is alive, the trust is exempt from estate taxes by the unlimited marital deduction. When the surviving spouse dies, the property becomes taxable to the surviving spouse’s estate. Estate tax is not assessed (or due) until after the remaining spouse has died, thus helping to limit taxes (i.e., applicable death and gift taxes). Like other trusts, a QTIP must have at least one named trustee who will be responsible for controlling the trust and managing its assets. A QTIP trust is irrevocable and cannot be easily modified so proceed with care.

How do you establish one? A QTIP is established by making a QTIP election on the executor's tax return. To make the election, the executor lists the assets to go into the QTIP trust on Schedule M to the estate tax return (IRS Form 706).

Do I need one? A common reason to set up a QTIP is when the grantor has beneficiaries from a previous marriage but the grantor dies before the subsequent spouse dies. The intent here is for the grantor to pass assets on to his beneficiaries/children instead of his spouse’s at the conclusion of both their lives. This can also prevent these assets from transferring from the surviving spouse to their new spouse should they remarry, or being eaten by divorce if the surviving spouse remarries and then divorces.

Another reason to set up a QTIP is when the grantor wants to assert control over how the funds are handled, or to provide protection from creditors. The surviving spouse never assumes the power of appointment over the principal. Because the surviving spouse is never the true owner of the property, a lien cannot be put against either the trust or the property within it for ordinary debts of the surviving spouse (debts to the government and judgments for child support are excepted from this protection See Va. Code § 64.2-744).

30 views0 comments

Bình luận

Post: Blog2_Post
bottom of page