Qualified Terminable Interest Property (QTIP) Trust Basics

Qualified Terminable Interest Property (QTIP) Trust Basics

The Qualified Terminable Interest Property (QTIP) Trust was a creation of ERTA-1981 pursuant to IRC § 2056(b)(7) which qualifies for the marital deduction, even if the surviving spouse is not given a general power of appointment during life or at death. Under a QTIP Trust, the surviving spouse need only be given all the income for life, which makes it similar to the traditional general power of appointment trust. However, unlike the general power of appointment trust, the personal representative must irrevocably elect (on Schedule M of the IRS Form 706 federal estate tax return) to qualify the trust in order for it to qualify for the marital deduction. If the election is not made in a timely fashion by the personal representative, the QTIP option is lost.

Perhaps the primary reason for the popularity of the QTIP trust is that the first spouse to die directs the disposition of the remaining trust estate upon the death of the surviving spouse, an ability to reach beyond the grave which is lost with an outright disposition qualifying for the marital deduction or a portability election. For that reason, the QTIP trust is often used in situations where there are multiple marriages and families.

Why QTIP? The QTIP Marital Trust is an attempt to balance the interests of the surviving spouse with the decedent's desires to provide for other beneficiaries. It allows the testator to take advantage of the marital deduction, but also gives the testator the power to determine who will receive the remainder at the surviving spouse's death, usually testator's children. Thus, the advantage of a QTIP Trust over a general power of appointment trust is that the testator can determine what happens to any principal remaining at the surviving spouse's death. With a general power of appointment trust, it is always possible that the surviving spouse could use the principal of this trust to finance a business of a second spouse or give the principal during life or after death to the second spouse or the children of the second spouse. This can be prevented with a QTIP Trust. Moreover, the QTIP Trust can actually protect the surviving spouse from any pressure by a second spouse to divert those funds. A QTIP Trust also allows some post-mortem marital deduction planning because the personal representative can elect to have all, a part, or none of the QTIP Trust qualify for the marital deduction, and can consider events occurring until the election is made.

Because many clients wish to control the ultimate disposition of their property and can convince their surviving spouse (although their consent is not a prerequisite of the election) that by the proper selection of fiduciaries, he or she can be protected in emergencies, the QTIP Trust is now used by attorneys more often than the general power of appointment trust. When the testator wishes to give the power to determine the final disposition of the assets to the surviving spouse, however, a general power of appointment trust may be used. An independent trustee can provide investment and other advice for a financially inexperienced surviving spouse. Another advantage of a general power of appointment trust is that the surviving spouse may be permitted to make lifetime gifts to descendants, friends, or charities. If the QTIP form is used, however, provisions can be incorporated to permit lifetime distributions of corpus to the surviving spouse who can then make gifts if he or she desires.

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

RELATED LINKS: For more on QTIP trusts, see:

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