What is a QTIP Trust?

Sure, there are so many different types of trusts out there.  A QTIP Trust, which stands for “Qualified Terminable Interest Property” Trust, is a beneficial type of trust, especially for couples who want to leave property to each other, while saving as much as they can on estate taxes.

A QTIP Trust is a type of irrevocable trust

All trusts can either be revocable, meaning subject to change, or irrevocable.  A QTIP Trust is irrevocable and used most often when leaving property to a surviving spouse, who will then leave that same property to their beneficiaries.  The assets placed in a QTIP trust will remain there until the death of the second spouse.  Because a QTIP trust is irrevocable, its terms cannot be modified, even by the surviving spouse.  Put another way, a QTIP Trust will allow you to give a life estate in property to your spouse without being subject to the federal gift tax.  This is true only as long as the recipient spouse does not have an income interest or power of appointment in the trust or its principal.

The most common use of a QTIP Trust

In most cases, an estate planning attorney will recommend establishing a QTIP trust when (1) the first spouse to pass away wants to leave assets to the surviving spouse, to be used only by the surviving spouse during his or her lifetime, and (2) the assets at issue exceed the federal estate tax exemption amount, which is currently $5.34 million.

The main provision of a QTIP Trust

In order for a trust to be a valid QTIP trust, the IRS requires specific language designating that the assets will qualify for the federal estate tax marital deduction, and that they will not be included in the estate of the first spouse to pass.  Without this language, the QTIP trust will not actually save on estate taxes, as expected.

Utilizing an Automatic QTIP Election

An automatic QTIP election can be created for certain joint and survivor annuities. In order to qualify for this automatic election, only the surviving spouse can have the right to receive payments before his or her death.  Considering the federal estate tax exemption of $5.34 million, it is typically not necessary to create a QTIP Trust, unless your estate will exceed that amount.  In other words, you would only use a QTIP trust to hold the assets in excess of the exemption amount.  The trust you and your spouse create does not necessarily have to include an A, B & C trust structure, as long as the total value of each spouse’s separate estate is less than $5.34 million. The surviving spouse will still be able to qualify for the federal estate tax marital deduction.

If you have questions regarding QTIP trusts, or any other estate planning needs, please contact Wilcox Attorneys, PA online or by calling us at (479) 443-0062.