Qualified Terminal Interest Protection Trust (QTIP) - Explained
What is a QTIP Trust?
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Back to: INHERITANCE, ESTATES, & TRUSTS
What is a Qualified Terminable Interest Protection (QTIP) Trust?
A Qualified Terminal Interest Protection Trust is an estate planning device. An individual generally uses this trust to provide for a surviving spouse. Basically, prior to passing, the decedent creates the trust and funds it with assets to be used for the benefit of the surviving spouse. She appoints a trustee to manage the assets (someone other than herself of the spouse). When she passes, the assets in the trust are not included in her estate (what she will pass to heirs in her will) for estate tax purposes. Basically, the assets in the trust are not subject to estate tax. This arrangement allows the decedent to provide for a surviving spouse without giving the spouse the assets outright. This can protect the spouse from tax consequences and/or maintain the decedents ability to control where the assets go when the surviving spouse ultimately dies. At that point, the trust generally dissolves and the assets held are distributed to whoever the original trust creator designates.
How Does a QTIP Trust Work?
The QTIP trust is generally set up where the trustee will manage the trust assets and distribute any income generated from the trust assets to the surviving spouse. This type of trust is commonly used by individuals who have children from prior marriages who they wish to inherit their property when the surviving spouse passes away. This allows the decedent to take care of the spouse and still leave the core trust assets to the kids. It also allows the decedent to shield the surviving spouse from tax consequences and attachment by creditors. The assets in the QTIP trust are subject to the marital deduction. That is, because the decedent is leaving the trust assets for the benefit of the spouse, the assets put into the trust are exempt from estate and gift taxation. Also, because the trust assets do not belong to the spouse, they will not be considered a part of her estate when she passes. Further, the trust is subject to taxation on the profits generated from the trust, not the beneficiary spouse. Lastly, if the spouse has debts to third-party debtors, those debtors cannot collect the debt from the trust assets. They can only go after any assets that have been distributed to the spouse and are in her possession. The decedent will generally appoint one or more trustees to manage the trust. The trustee may be an individual or a professional services firm specializing in trust management. This is important when the trust is expected to generate profits from investing the trust assets. These profits are ultimately what is distributed to the trust beneficiary. The assets in the trust will not become subject to estate and gift taxation until the beneficiary passes away and the remaining assets are distributed as the decedent originally directed. At that time, if the estate exceeds the amount of the applicable estate and gift exemption at the time (over $11 million total for an individual decedents estate), the excess amount will be taxed to the trust assets.
- Succession Planning
- Chartered Trust and Estate Planner
- Cy Pres Doctrine
- Exordium Clause
- Non-Contestability (No Contest) Clause
- Per Stirpes
- Elective Share
Qualified Domestic Relations Order (QDRO)
- Declaration of Trust
- Uniform Gifts for Minors Act
- Acceptance of Office by Trustee
- Beneficial Interest
- Asset Protection Trust
- Bare Trust
- Blind Trust
- Charitable Lead Trust
- Credit Shelter Trust
- Discretionary Trust
- Generation Skipping Trust
- Grantor Trust Rules
- Living Trust
- Inter Vivos Trust
- Qualified Domestic Trust (QDOT)
- Qualified Terminal Interest Protection Trust (QTIP)
- ABLE Account
- Accumulated Income Payments (Canada)
- Charitable Split-Dollar Insurance Plan
- Coverdell Education Savings Account