QTIP Trusts 101

Estate Planning, Investing & Retiring, Trusts

A QTIP in the financial field refers to Qualified Terminable Interest Property, a definition used in forming a special type of trust. QTIPs are properties such as lifetime income interests that qualify for the marital deductions on estate taxes.

There are three primary purposes to a QTIP trust:

  • Direction of Assets After Surviving Spouse’s Death – This is sometimes thought of as the “second marriage” purpose, and it is usually done to make sure that a second spouse is properly cared for upon your death while insuring that assets pass through to children by a first marriage. In essence, this keeps a second spouse from cutting off intended heirs during his or her lifetime.
  • Managing Assets for the Surviving Spouse – Your spouse may have difficulty managing assets after your death and may fall prey to manipulative family members or future spouses, or he or she may simply not want to deal with the issues at all. A QTIP trust provides protected income and use of the asset (such as land) over the life of your spouse, while preventing him or her from changing the disposition of the assets or squandering them through bad decisions.
  • Estate Taxes – Use of a QTIP trust delays estate taxes until the death of the surviving spouse, through the estate tax marital deduction, yet allows the decedent to control assets “beyond the grave” in a way.

The QTIP trust is generally set up by couples as components of wills, although it can be a separate document. A certain amount of assets is designated to be entered into the QTIP trust upon the death of one spouse, and beneficiaries are named to inherit the assets after the death of the surviving spouse. The surviving spouse receives income from the trust assets for life and the assets are distributed per the QTIP trust instructions after the surviving spouse’s death.

The QTIP provides flexibility in one aspect — tax laws and other situations may change by the time you or your spouse pass away, and it is possible that the QTIP is no longer best for your situation. The executor of your will must “elect” to execute the QTIP on the estate tax return and transfer the desired assets into a QTIP trust. Once the return is filed (generally nine months after death), the decision is irreversible; without the election, the QTIP does not take place.

Choose your executor wisely. If your spouse is the executor of your will, several of the primary reasons for establishing a QTIP may be negated.

Note that since this takes advantage of a marital deduction, couples must be legally married to receive the QTIP trust’s advantages. It is not clear if QTIPs apply to same-sex marriages yet, so if you fall in this category consult with local financial planners. The Supreme Court may have the final say, but at this point, it appears more likely than not that same-sex marriage will eventually be legalized nationwide and QTIP strategies will be available to same-sex married couples.

QTIP trusts are not straightforward, and may contain modifications and clauses regarding how the assets are distributed and managed after your death. They must be drafted carefully to avoid legal conflicts and ensure that your plans are followed.

Seek the advice of a qualified financial planner and an attorney before entering into a QTIP. The financial planner can advise you on options other than QTIP trusts that may meet your same goals, and you will need an attorney skilled in financial matters to draft whatever plan you choose — QTIP or otherwise.

Photo ©iStockphoto.com/skynesher

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