Back to: INHERITANCE, ESTATES, & TRUSTS
Qualified Terminable Interest Protection (QTIP) Trust Definition
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 decedent’s 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.
A Little More on What is a QTIP Trust
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 decedent’s estate), the excess amount will be taxed to the trust assets.
References for Qualified Terminal Interest Protection Trust
Academic Research on Qualified Terminable Interest Property Trust
A Reevaluation of the Terminable Interest Rule, Abrams, H. E. (1983). Tax L. Rev., 39, 1. This paper defines terminable interest as the interest in a property that is scheduled to end in the occurrence of an event or after a certain period, or the failure of an event or condition occurring. It then reviews the terminable interest rule which states that when one spouse transfers terminable interest property to the other spouse, the property will not qualify for marital deduction unless in special circumstances.
Qualified Terminable Interest Property: Discussion of the Alternative Bequest Approach in Clayton v. Commissioner, Johnson, D. C. (1993). S. Ill. ULJ, 18, 159. This article reviews the QTIP exception to the terminable interest rule by studying the recent court decisions and the Fifth Circuit Opinion. The Fifth Circuit stated that marital property was allowable for the duly elected portion of a QTIP. It also rejected the application of the proposed regulations that denied treatment of QTIP.
Estate Tax Apportionment and Nonprobate Assets: Picking the Right Pocket, Featheringill, C. B. (1990). Cumb. L. Rev., 21, 1. This paper states that if a state lacks an apportionment statute, the tax burden is shifted on the decedent’s probate estate. This is why a majority of states have appointed these statutes to determine how to allocate estate taxes. Moreover, these apportionment statutes are made uniform across states so that testators can rely on similar provisions no matter where they reside or where the property is located
Estate planning in an era of uncertainty, Fox, S., & Abendroth, T. (2001). Journal of Financial Planning, 14(9), 102. This study presents the uncertainty and consequences that accompany the repeal of the estate act which includes the disappearance for individuals to do estate planning. However, as this study postulates, even if the revocation is done permanently, the gift tax would be retained, and it would still require individuals to plan their financial activities to minimize taxes.
Estate and Income Tax Planning for Retirement Plans IRAs, Petrie, G. B. (1995). Idaho L. Rev., 32, 253. This paper explains the benefits associated with contributing to a qualified retirement plan or IRA as a way of saving for retirement. It further states that since these accounts don’t receive a step-up in income tax basis after the owner dies, the amounts distributed from them are subjected to income taxes when they reach the accounts of the heirs.
Qualified Disclaimers: Planning Considerations under the Final Regulations, Ramlow, J. M. (1987). Idaho L. Rev., 24, 413. This article explains a qualified disclaimer which is refusing to accept property that fulfills the set provisions in the Internal Revenue Code tax reform Act which advocates for property to be treated as an entity never received before. It also discusses the planning considerations associated with final regulations regarding the deduction of qualified business income.
Federal Taxation, Evans, S. C. (1990). Mercer L. Rev., 42, 1481. This paper investigates how the US constitution mandates the federal government to collect different types of taxes from its citizens to finance the governing of the country. The paper outlines the forms of taxation allowed by the constitution and the bodies of law that govern each. These taxes are charged upon receiving or giving money and property.
Premarital Contracting: Why and When, Cantwell, W. P. (1992). J. Am. Acad. Matrimonial Law., 8, 45. This study presents premarital contracts which are commonly known as prenuptial contracts. They are made between two parties who are intending to marry and are recognized by all states through statutes or court decisions. These agreements contain details of the properties owned by each person and states the rights each party will possess after marriage.
FINDINGS OF FACT & CONCLUSIONS OF LAW, RAINEY, J. D. (2009). This paper explains how judges issue the finding of facts and conclusions of law after hearing motions. The finding of facts represent the facts that the judge believes to true and the conclusions of law derived from those facts. They enable a losing party to understand how the judge reached a decision and whether to appeal the ruling.
Estate Planning and the Generation-Skipping Transfer Tax, Wren, H. G. (1981). Case W. Res. L. Rev., 32, 105. This article explains estate planning and the generation-skipping transfer tax that might follow. This generation-skipping transfer tax occurs when the transfer of property is done to a beneficiary who is thirty-seven and a half years younger than the property donor. It ensures that taxes are paid only when the beneficiary receives assets placed in a trust and they are more than the generation-skipping estate tax credit.
ESTATE PLANNING FOR BUSINESS OWNERS: A CASE STUDY., Blesy, D. J. (1993). Journal of Financial Planning, 6(4). This paper uses a case study to explain the steps that business owners should take in estate planning. This is because the owners should leave a plan for the business in the event of unforeseen circumstances. The paper states that this planning should start when forming the business and that various provisions should be put forth in the original entity documents.