QTIP Trust: A Powerful and Flexible Option

While a QTIP trust is an odd sounding name for an estate planning technique, it nevertheless can be a crucial strategy, especially if you’re currently in a second marriage. The QTIP moniker is an acronym for “Qualified Terminable Interest Property.” Essentially, the trust provides future security for both a surviving spouse as well as children from a prior marriage, while retaining estate planning flexibility.

Notably, any federal estate tax due on QTIP trust assets is postponed until the death of the surviving spouse. At that time, his or her gift and estate tax exemption may shelter the remaining trust assets from tax.

A QTIP trust in action

Generally, a QTIP trust is created by the wealthier spouse (e.g., the grantor). When the grantor dies, the surviving spouse assumes a “life estate” in the trust’s assets. This provides the surviving spouse with the right to receive income from the trust, but he or she doesn’t have ownership rights — thus, he or she can’t sell or transfer the assets. Upon the death of the surviving spouse, the assets are passed to the final beneficiaries, who may be the children from the grantor’s prior marriage.

Accordingly, one must designate the beneficiaries of the QTIP trust, as well as the trustee to manage the assets. This could be a spouse, adult child, close friend, or, as is often the case, a third-party professional.

Estate tax ramifications

A QTIP trust is designed to combine the estate tax benefits of the unlimited marital deduction and the gift and estate tax exemption. When you create the trust and provide a life estate to a spouse, the assets are sheltered from tax by the unlimited marital deduction available at one’s death.

After the spouse passes, assets in the QTIP trust are subject to federal estate tax. However, the $13.61 million gift and estate tax exemption (for 2024) can be used to shelter some estates from estate tax liability.

Planning flexibility 

A QTIP trust can provide added flexibility to one’s estate plan as well. For example, at the time of death, a family’s situation or the estate tax laws may have changed. The executor of the decedent’s will can choose to not implement a QTIP trust if that makes the most sense. Otherwise, the executor makes a QTIP trust election on a federal estate tax return. (It’s also possible to make a QTIP election over a portion of the eligible assets.)

Once the election is made and the estate tax return is filed within nine months after the death, it’s irrevocable.

Right for your plan? 

If you wish to provide for your spouse after your death, but at the same time ensure that your children ultimately receive the inheritance you want to provide for them, a QTIP trust might be the preferred option. Contact Anchin Private Client Group member Kelly Igoe, or your Anchin Relationship Partner, to discuss whether a QTIP trust is right for you.