QTIP Trust Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of QTIP Trust, written in plain English, along with examples of how it is used.

What is QTIP Trust?

A trust that provides a person’s spouse with income for life that is free of estate tax. The trust’s assets pass to the beneficiaries designated by the trust’s creator when the spouse dies. When the beneficiaries receive the assets, estate taxes are applied.

History and Meaning of QTIP Trust

A QTIP trust, short for Qualified Terminable Interest Property trust, is a type of trust that allows a person to provide for their spouse while still maintaining control over how their assets are distributed after both of their deaths. The trust creator can specify how they want the trust assets to be distributed once their spouse passes away. The marital deduction allows assets placed in the QTIP trust to pass to the surviving spouse tax-free while still allowing the trust creator to control the final distribution of the assets.

The QTIP trust was created as part of the Tax Reform Act of 1986 to allow people to provide for their spouse while still maintaining control over how their assets were ultimately used. The trust was designed to prevent an individual's assets from passing outside the family and to minimize estate taxes by taking advantage of the unlimited marital deduction.

Examples of QTIP Trust

Here are a few examples of how a QTIP Trust might be utilized:

  1. A married couple with a significant amount of assets decides to create a QTIP trust to provide income for the surviving spouse while ensuring that the remaining assets are distributed only to their children or other designated beneficiaries.
  2. A widowed parent remarries and wants to ensure that their children inherit their assets instead of the surviving spouse. They create a QTIP trust, naming their children as beneficiaries, while still allowing their new spouse to receive income from the trust during their lifetime.
  3. A wealthy individual with multiple marriages wants to prioritize supporting their children and grandchildren while still providing for their current spouse. They establish a QTIP trust which pays income to their spouse for life but dictates the final distribution of assets to their descendants.

Legal Terms Similar to QTIP Trust

Here are some other legal terms that are similar to QTIP trusts:

  1. Marital Deduction - This is the legal deduction that allows you to transfer assets to your spouse upon your death without incurring estate tax.
  2. Bypass Trust - A trust that allows an individual to pass assets to their heirs tax-free by using the estate tax exemption of both spouses.
  3. Irrevocable Trust - A trust that cannot be changed or cancelled without the permission of the beneficiaries.
  4. Living Trust - A trust created during the lifetime of the trust creator, which allows them to manage and distribute their assets while they are still alive and provides for the distribution of remaining assets after their death.