QTIP Trust (Qualified Terminable Property Interest Property Trust)

Details

The QTIP trust, also known as a qualified terminable property trust, allows a spouse to control the ultimate destination of their assets if they outlive them. The trust provides for the survivor spouse when the first spouse passes away. When the survivor spouse dies the assets are given to the beneficiaries chosen by the first […]

QTIPs is a brand of QTips.

Estate planning

Tools that can be used by couples for two main purposes: To protect each other and to enhance their relationship.

beneficiaries

If a spouse survives and remarries, or has more children.

Estate taxes

Estate taxes are usually only applicable to estates with large values.

QTIP Trusts are testamentary trusts, meaning they come into effect after the death of the original creator. In general, the income that the survivor spouse receives from the trust is not subject to the estate tax. The trusts are irrevocable.

The pros and cons of QTIP Trust

Advantages
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.

Best for:

Ease of use.

Cost:

One-time fee of $159 per individual or $259 for couples. $19 annual membership fee thereafter.

Best for:

Users who want an all-inclusive experience.

Cost:

$99 per year for Starter plan. $139 per year for Plus plan. $209 per year for All Access plan.

Best for:

State-specific legal advice.

Cost:

$89 for Basic will plan. $99 for Comprehensive will plan. $249 for Estate Plan Bundle.

Why is a QTIP Trust created?

The main job of QTIPs is to provide assistance.

1. Surviving spouses can receive financial security

QTIP Trusts are designed to provide a lifetime income for a spouse who survives, while still preserving the remainder of an inheritance for original beneficiaries. These children usually come from previous marriages. QTIP can be created by both spouses but only one QTIP will have an effect on the surviving spouse.

2. Reduced estate tax for couples with high net-worth

QTIP Trusts are eligible for the IRS marital tax deduction. This allows the surviving spouse the ability to get assets from the trust without having to pay federal estate taxes. If the estate was large enough to be assessed estate taxes, the tax will only apply after the death of the second spouse. The federal estate tax rates range from 18%-40% and are generally applicable to assets above $12.06 or $12.92 millions in 2022.

3. You can be certain

A QTIP is an irrevocable trust, so the spouse who survives cannot change their share of money or transfer the principal to another person. The surviving spouse will usually receive the income earned by the assets of the trust. They may also be allowed to access any property or houses in the trust but cannot sell them. Principal and ownership of the property are only available to those who were intended as beneficiaries by the deceased spouse.

What is the process for setting up a QTIP Trust?

You can create a QTIP Trust by making a QTIP selection on IRS Form 706 (Estate Tax Return). On Schedule M, Part A, list the assets you’ve chosen (often called “qualified terminable interests property”) along with their values.

You need to meet a few conditions:

The spouse who survives must be an American citizen. You might still be able set up an Qualified Domestic Trust if they’re not.
At least one time per year, the surviving spouse is entitled to receive income through QTIP.
The trustee is responsible for managing the trust. A family member, an attorney or another trusted person can act as trustee. It’s better if the person who will be acting as trustee is not your spouse, due to the QTIP’s purpose.
The surviving spouse can require that the trustee convert the assets into “profitable properties” (i.e. something which produces income).

QTIP Trust vs. Grantor Retained Annuity Trust

Who inherits assets in a QTIP and who does not is the main difference. The GRAT trust is irrevocable and the grantor places assets in the trust to receive an annuity.

The GRAT assets, including capital gains, are transferred to beneficiaries upon the death of the trust’s grantor. The trust, because it is irrevocable is not technically part of the estate. Therefore the death of the grantor does not trigger an estate tax.

Best for:

Ease of use.

Cost:

One-time fee of $159 per individual or $259 for couples. $19 annual membership fee thereafter.

Best for:

Users who want an all-inclusive experience.

Cost:

$99 per year for Starter plan. $139 per year for Plus plan. $209 per year for All Access plan.

Best for:

State-specific legal advice.

Cost:

$89 for Basic will plan. $99 for Comprehensive will plan. $249 for Estate Plan Bundle.

QTIP trust vs. marital trust

A QTIP is different from a marital or family trust in that non-spouse beneficiaries can inherit assets. When the grantor passes away, a marital trust distributes assets to surviving spouses and beneficiaries (usually their children).

In contrast, a QTIP will only pass assets on to the final beneficiaries after the death of the survivor spouse. A marital trust also gives the surviving partner more control of a part of the assets, while a QTIP only allows the spouse to receive the income from assets.