Qualified Terminable Interest Trust (QTIP Trusts) are an estate planning tool used to maximize a couple’s applicable exclusion amounts while qualifying for the marital deduction. Full property interest transfers to spouses do not trigger most gift or estate taxes under the marital deduction. However, most terminable property interests gifted to a spouse whether they be through a trust or other method will not qualify for the marital deduction and remain subject to gift and estate taxes. However, there are some exceptions that allow terminable property interests to be transferred to spouses with the beneficial tax treatment including the QTIP Trust.
If the spouses follow certain guidelines, a QTIP Trust allows the surviving spouse to benefit from the trust and be able to use the marital deduction. The QTIP Trust must only benefit the surviving spouse during their lifetime, and this must be specifically provided for in the trust documents and unchangeable by the spouse or trustee. Otherwise, the QTIP Trust will not receive the marital deduction. After the benefiting spouse passes, the QTIP Trust assets pass to the beneficiaries as set by the granting spouse, not the benefiting spouse. For estate tax purposes, the QTIP Trust assets apply to the benefiting spouse’s applicable exclusion amount. The lifetime payments to the benefiting spouse come from the income of the QTIP Trust and must be made at least annually. Typically, the spouse will not receive payments from the principal unless otherwise provided for. Also, to receive QTIP Trust treatment, the manager of the granting spouse’s estate must file tax documents accordingly. All of these requirements must be followed in order to receive the tax benefits. However, if followed, the QTIP Trust can ensure the surviving spouse retains income from the assets during their lifetime without incurring extra taxes and allowing the granting spouse to determine how the assets will eventually be distributed.
[Last updated in March of 2022 by the Wex Definitions Team]