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Use this estate planning tool to pass assets to beneficiaries while providing stable income for your spouse.
This type of trust lets you claim the marital deduction and pass along assets to beneficiaries while providing income for a surviving spouse
A QTIP trust is more restrictive than a marital trust, since it limits the surviving spouse’s control
The surviving spouse is limited to the income and cannot choose the final beneficiaries of the QTIP trust assets
Estate taxes are deferred until the death of the surviving spouse
A QTIP trust (officially a qualified terminable interest property trust) is a type of trust that allows someone to provide income for their surviving spouse and bequeath property and assets to a different set of beneficiaries. The QTIP trust also minimizes the decedent’s estate tax, because the trust assets inherited by the spouse are generally not taxed (this is known as the marital deduction). Instead, the estate taxes will be deferred until the death of the surviving spouse when the trust assets are included in their taxable estate.
However only estates that exceed the estate tax exemption limit need to pay the tax. The federal estate tax exemption is $11.58 million in 2020, so less than 1% of people will have to pay it.
A QTIP trust is similar to a marital trust, which also holds the assets of the spouse who dies first, but the QTIP trust has more restrictions. When one spouse dies, the assets transfer into a QTIP trust and no estate taxes are paid at this time. The QTIP trust pays an income to the surviving spouse who may also use some of the trust assets for their own benefit, but the trust assets are inherited by someone else of your choosing, like your child from a previous marriage. When the surviving spouse dies, the QTIP property is includable in their gross estate.
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You can create a QTIP trust while you’re alive, or you can choose to have your assets transfer into one upon your death, typically through a will. This article mainly refers to QTIP trusts that are created after a spouse dies. The rules for a QTIP trust established during the lifetime of a grantor may be slightly different, so consult with an estate planning attorney for more detail.
When you set up a QTIP trust you will name a trustee and two types of beneficiaries — a lifetime beneficiary and remainder beneficiary (also known as a final beneficiary). The lifetime beneficiary is the surviving spouse, who receives the trust income over the entirety of their life and has limited access to some of the trust’s assets. The remainder beneficiary is the person who receives the trust assets upon the surviving spouse’s death. QTIP trusts are irrevocable, meaning they can’t be modified.
For example, let’s say you put a house and other financial assets into a QTIP trust and name your spouse as the lifetime beneficiary and your daughter as the remainder beneficiary. When you die, your surviving spouse will receive income from the QTIP trust and continue to live in the house. However, they cannot sell the house because they do not own the QTIP trust assets — the trust does.
A key feature of the QTIP trust is that the surviving spouse receives the trust income for the rest of their life, no questions asked. (This is important for estate tax purposes, which we’ll discuss later.) You may be able to specify the “income” as a fixed percentage or amount. The surviving spouse should have limited access to the trust’s principal but they may be able to receive some of it in certain circumstances, such as towards health, education, maintenance and support.
While a trust can hold many different types of assets, it’s important that the QTIP trust contains some income-producing property, like a rental property or investment accounts. Since the primary purpose is to provide a steady stream of income for your surviving spouse, the QTIP won’t really work if it holds assets that don’t generate income. When setting up the trust, you can specify that any non-income producing assets be sold or converted into such.
When a QTIP trust is properly structured according to the terms of the IRS, the assets can qualify for the marital deduction. Claiming the martial deduction on a tax return allows assets of any value to pass between spouses tax-free. For this to happen, one spouse typically must give the other spouse the assets “outright” to use as he or she pleases. However, you may have noticed that the surviving spouse does not have outright access to the QTIP trust assets — in fact, they won’t even inherit the assets when they die, since they are not the trust’s final beneficiary. That is why the QTIP trust must be structured to distribute income, to show that the surviving spouse has a “qualified lifetime interest.”
The marital deduction ultimately ensures that the QTIP trust assets will not count towards the deceased spouse’s taxable estate. The estate tax exemption is $11.58 million in 2020.
If you choose for property to transfer to a QTIP trust upon your death, then your executor must claim the marital deduction on the federal estate tax return by listing qualified property on Schedule M. You can talk with a tax professional or other financial advisors for more information.
The QTIP trust terminates when the surviving spouse dies, and the assets are distributed to the final beneficiaries. The trust assets are counted as part of the gross estate of the surviving spouse and taxes must be paid if it is valued over the exemption limit.
QTIP trusts are similar to marital trusts. You might even say a QTIP trust is like a specific type of marital trust. You can consult with an estate planning attorney for more detail since the trusts can be tailored to your needs and the nuances are very important.
A marital trust is simply a trust that is created upon the death of the first spouse for the surviving spouse’s use. It is one part of a bypass trust, also known as an AB trust. Unlike with a QTIP trust, the surviving spouse typically has complete control over a marital trust, including use of the trust assets and final say on designating who the final beneficiaries are.
A QTIP trust offers more control to the grantor but less control to the surviving spouse compared to marital trust. The surviving spouse cannot choose final beneficiaries and has limited control over the assets, receiving only trust income in accordance with the IRS laws. The marital trust is more flexible and can be modified or set up by the grantor to best fit the circumstances.
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QTIP trusts are more complicated to set up and require a bit of maintenance, so they aren’t ideal for everyone. For most of its benefits, there may be a simpler type of irrevocable trust that fits your needs. A marital trust or bypass trust may be sufficient. How much wealth you and your spouse have and how separate you want to keep it may dictate the extent to which you need this specific type of trust.
The QTIP trust can help minimize estate taxes since they are deferred until the death of the surviving spouse. Keep in mind that the surviving spouse’s estate may owe taxes.
In 2020, only estates over $11.58 million are taxed. Most people don’t have estates valued this high, but if you want to avoid or minimize estate taxes more fully, you can open a credit shelter trust in conjunction with the QTIP trust.
A QTIP trust can be a useful part of an estate plan for a blended family. For example, if you are remarried, you can open a QTIP trust that distributes income to your spouse, but which ultimately gives the trust assets to your daughter from a previous marriage, the final beneficiary. This allows you to plan for both people.
Another example: You can set up a QTIP trust and name the beneficiary your son while your surviving spouse receives the income. If your surviving spouse remarries and has a child with a new partner, they cannot redirect the QTIP trust assets to their new child.
All irrevocable trusts offer asset protection from creditors. By restricting a surviving spouse to only receiving income, there is less risk of losing the assets in the case of lawsuits or debt collectors. The assets are also not countable toward Medicaid resource limits, so this trust can help the surviving spouse qualify for long-term care if their income falls under the eligibility requirements.
Similar to the above, the trust offers protection from financial predators. When the surviving spouse receives a limited stream of income, there is simply less money that is susceptible to scams or the beneficiary's own unwise spending habits.
Individuals who become incapacitated and haven’t planned ahead by electing powers of attorney may have a guardian appointed for them by the court. The guardian will have legal authority over the ward’s finances, including money and assets in a revocable living trust, but they won’t be able to touch assets in an irrevocable trust such as a QTIP trust.
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