When to Use a QTIP Trust

POSTED ON: September 10, 2021
CATEGORY: Estate Planning
qtip trust
If you’re married, you may consider establishing a QTIP trust, which is short for qualified terminable interest property trust.

Using trusts in an estate plan protects assets and financial legacies, explains Jerry Taylor of Jerry Taylor Law in Fairhope, Alabama. Married couples often use a QTIP trust to allow the grantor, the person creating the trust, to set aside assets for their spouse and establishing some control over the assets after the grantor has passed.

If you are concerned about what might happen to your spouse after you have died, a QTIP can provide some reassurance.

What is a Qualified Terminable Interest Property Trust? A QTIP lets one spouse provide income for another and can be used to pass assets to other beneficiaries, including children. The QTIP has some similarities to a marital trust, which is also used to hold assets belonging to a spouse. However, the marital trust is not as restrictive as a QTIP. When the grantor of the QTIP dies, their assets are transferred into the trust, which then provides income for the surviving spouse.

How does a QTIP Trust Work? QTIPs are types of irrevocable trusts. Once assets are transferred to the trust, in most cases, the transfer can’t be reversed. This is especially useful for second marriages, where there are children from a prior marriage. The QTIP allows the grantor the ability to provide for their second spouse and protect children from the previous marriage.

Assets can be transferred to the QTIP when it is created, or they can be transferred at the time of death. Usually this is done through the creation of a separate will.

You’ll need to name a trustee for the QTIP, who will manage the trust and oversee distributions. You should also name a successor trustee, in case the original trustee cannot serve.

The spouse of a grantor is considered a lifetime beneficiary, as they may draw on the trust income as long as they are living. When the surviving spouse passes, the people who receive the assets left in the trust, or “remainder,” are known as “remainder beneficiaries.” They may be children from a prior marriage, or anyone else named by the grantor.

The surviving spouse benefits from the QTIP because it provides an income stream. Assets held in a QTIP may be investment properties and taxable investment accounts. The estate benefits from the QTIP because assets qualify for the marital deduction and are excluded from the estate at the grantor’s death. When the surviving spouse dies, the QTIP trust is dissolved, and assets are passed to remainder beneficiaries. At this point, assets in the trust are included in the surviving spouse’s estate for estate tax purposes.

A QTIP, and the separate will for it, should be established with an estate planning attorney to ensure it works with the rest of your estate plan. This is especially important when there are children from second marriages in the family.  For more information contact Jerry Taylor Law.

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