Qualified Terminable Interest Property Trust

A Qualified Terminable Interest Property (QTIP) Trust is a specific type of irrevocable trust used in estate planning. It allows a spouse to provide for their surviving spouse for a lifetime while maintaining control over how the trust’s assets are distributed once the surviving spouse passes away.

When the first spouse dies, some or all of their assets move into the QTIP Trust. The trust is required to pay all income generated by the assets to the surviving spouse for the rest of their life. However, the underlying principal (the assets themselves) is preserved for the final beneficiaries named by the first spouse, such as children from a prior marriage.

QTIP Trusts are ideal for blended families because they prevent the unintentional disinheritance of children from a previous marriage. The trust ensures the surviving spouse is financially supported, but they cannot change the beneficiaries. This guarantees that the first spouse’s children eventually inherit the remaining assets.

A major benefit of a QTIP Trust is the unlimited marital deduction. Assets placed in the trust qualify for this deduction, meaning no estate tax is owed on them when the first spouse dies. Taxation is deferred until the death of the second spouse, which preserves more wealth for the survivor’s lifetime use.

For a trust to qualify as a QTIP, the surviving spouse must be the only beneficiary during their lifetime and must receive all income generated by the trust at least annually and the assets generally must be income-producing or convertible to income-producing property. Additionally, the executor of the estate must make a specific “QTIP election” on the estate tax return.

Generally, the surviving spouse is entitled only to the income generated by the trust, not the principal. However, the trust terms can be drafted to allow the trustee to distribute principal for specific needs, such as health, education, maintenance, or support, depending on how strict the grantor wants to be.

The deceased spouse who establishes the trust (the grantor) retains control over the final distribution. Even though the surviving spouse benefits from the assets for years, they cannot change the ultimate beneficiaries. This control is the defining feature distinguishing a QTIP from a survivor’s trust.

The main downsides are complexity and rigidity. Because the trust is irrevocable upon death, it cannot be easily altered if family circumstances change. Additionally, the requirement to distribute all income might increase the surviving spouse’s income tax liability, and the trust requires a trustee to manage it, which can incur administrative fees.

In a standard Marital Trust (often called an “A Trust”), the surviving spouse usually has the power to decide who gets the assets after they die. In a QTIP Trust, that power is withheld; the first spouse locks in the ultimate beneficiaries, ensuring the survivor cannot redirect the inheritance to a new spouse or different heirs.

You should consider a QTIP Trust if you are part of a blended family (protecting children from a prior marriage) or if you have a taxable estate. Even without tax concerns, it is the premier tool for controlling where your assets go after your spouse dies.

The “QTIP Election” is a formal declaration made by the executor of the deceased spouse’s estate on the federal estate tax return (Form 706). This election is critical; without it, the assets in the trust will not qualify for the marital deduction and could be subject to immediate estate taxes.

Yes, to a certain extent. Because the assets are held in a trust and the surviving spouse does not own the principal outright, the trust assets are generally protected from the surviving spouse’s creditors. However, the income distributed to the spouse may still be vulnerable to creditor claims.

If the surviving spouse remarries, the assets in the QTIP Trust remain protected for the original beneficiaries. The new spouse has no claim to the trust principal. The income payments continue to the surviving spouse, but upon their death, the money goes to the original children, not the new spouse.

The trustee manages the assets and ensures income is paid correctly. While the surviving spouse can serve as trustee, it is often better to appoint a neutral third party or a professional trustee, especially in blended families, to prevent conflicts of interest between the stepparent and stepchildren.

The first step is a consultation with an estate planning attorney to value your estate and identify your beneficiaries. At Copper State Planning, we help you draft the specific trust provisions, select an appropriate trustee, and ensure the language meets all IRS requirements for the marital deduction.