Qualified Terminable Interest Property Trust (“QTIP Trust”)
A Qualified Terminable Interest Property Trust—also known as a QTIP Trust—is a type of trust that enables the grantor to provide for a surviving spouse while still maintaining control of the way in which the trust’s assets are distributed once the surviving spouse passes away.
The QTIP trust is sometimes referred to as a Marital Qualified Terminable Interest Property Trust. This trust is established to provide a surviving spouse with lifetime income that is derived from money that is earned by the assets that are transferred to the trust. Income generated from the trust is given to the surviving spouse to ensure that he or she is taken care of for the rest of his or her life.
Traditionally, the surviving spouse is prohibited from accessing the trust’s principal funds or any of the property that is held by the trust. When the surviving spouse passes away, the assets within the trust will pass to the beneficiaries that are named within the trust instrument. This feature is a key reason this type of trust is commonly used by individuals who have children from another marriage. Why? Because a Qualified Terminable Interest Property Trust empowers the trust’s creator to provide for the current spouse and as well as guaranteeing that remainder of the trust is then allocated to beneficiaries of the grantor’s choosing, such as the grantor’s children from a previous marriage.
The Qualified Terminable Interest Property Trust is especially effective for any person who is concerned that their spouse will remarry after their death; taking their hard-earned money and allocating it however they choose fit. If a grantor were to simply leave behind their lifetime of assets to their surviving spouse, those concerns would be well-founded; if the surviving spouse were in fact to remarry, the assets and real property could very well wind up in the hands of the new spouse. The benefit of a QTIP Trust is that it provides for a surviving spouse for the duration of the life of the surviving spouse, but the grantor rather than the surviving spouse—and anyone they might remarry—retains control over where the assets and real property are ultimately distributed.
Typically when someone bequeaths assets or real property to another at death, those assets or real property is subjected to a federal estate tax—also known as the death tax—in addition to another tax, the federal gift tax.
The IRS limits the amount that a person can gift another tax free, and if the if the dollar amount of the assets or real property exceeds the applicable exclusion amount, substantial taxes are levied. However, when assets or real property are left to a surviving spouse, the unlimited marital deduction kicks in, allowing spouses to
transfer any amount of property between the pair, during life or at death, without triggering either the federal estate tax or the federal gift tax.
Wonder if a QTIP Trust is right for you? Seek the counsel of a qualified estate-planning lawyer today.
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