What is a Qualified Interim Interest Property Trust (QTIP)?
A qualified temporary interest property trust (QTIP) allows the donor to support a surviving spouse and retain control over the distribution of trust assets after the death of the surviving spouse. The income generated by the trust, and sometimes the principal, is given to the surviving spouse to ensure that the spouse is supported for the rest of their life.
Key points to remember
- A qualified Terminating Interest Property Trust (QTIP) allows a person, called the settlor, to leave assets to a surviving spouse and determine how the assets of the trust are distributed after the death of the surviving spouse.
- Under a RAQT trust, income is paid to a surviving spouse while the balance of funds is held in trust until the death of that spouse. At this point, the remainder is paid out to the beneficiaries specified by the grantor.
- QTIP trusts are used in estate planning and are particularly useful when beneficiaries exist from a previous marriage, but the settlor predeceases a subsequent spouse.
- In the QTIP trust, the inheritance tax is not assessed at the time of the death of the first spouse, but is determined after the death of the second spouse.
- A RAQT trust is established by making a RAQT trust election on the executor’s tax return.
How Qualified Interim Real Estate Trusts Work
This kind of irrevocable trust is commonly used by people who have children from another marriage. QTIP trusts allow the settlor to look after their spouse and ensure that the assets of the trust pass after the death of that spouse to beneficiaries of their choice. Beneficiaries can be children from the settlor’s first marriage, other family members or friends.
In addition to providing the living spouse with a source of funds, a RAQT trust can also help limit death and gift taxes. Assets within the RAQT trust providing income to a surviving spouse are eligible for spousal deductions, which means that the value of the trust is not taxable after the death of the first spouse. Instead, the property becomes taxable after the death of the second spouse, with responsibility transfer to designated beneficiaries of assets within the trust.
Additionally, QTIPs can assert control over how funds are managed in the event of the death of the surviving spouse, as the spouse never assumes power of appointment over the grantor. This can prevent these assets from being transferred to the living spouse’s new spouse if they remarry.
QTIP trusts are reported on tax returns using IRD Form 706.
Qualified Termination Interest Property Trustee Appointments
A minimum of one curator must be appointed to manage the trust, although there may be more than one appointed simultaneously. The trustee(s) will be responsible for controlling the trust and will have authority over the management of the assets.
Examples of possible trustees include, but are not limited to, surviving spouse, financial institution, attorney, and other family members or friends.
Spousal Payments and QTIP Trusts
The surviving spouse named in a RAQT trust generally receives payments from the trust based on the income generated by the trust, similar to stock dividends. Payments can be made from the principal if the settlor allows it when creating the trust.
Payments will be made to the spouse for the rest of their life. Upon death, payments cease, as they are not transferable to another person. The assets in the trust then become the property of the named beneficiaries.
QTIP trust vs marital trust
|Name only spouse as beneficiary||Name only spouse as beneficiary|
|Unlimited spousal deduction||Unlimited spousal deduction|
|Defer taxes until death of spouse||Defer taxes until death of spouse|
|Control does not pass to spouse||Control passes to spouse|
|Income from assets or capital paid to the spouse||The surviving spouse controls the distribution of assets|
Each type of trust can help you achieve similar estate planning goals. However, the main differences lie in how the assets of the trust are controlled. For example, a QTIP allows the settlor to dictate how trust assets are distributed to their spouse and requires distributions to be made at least once a year.
A marital trust allows the surviving spouse to dictate the distribution of assets – it does not require distributions and that spouse can even add new beneficiaries. A spousal trust offers more flexibility, as this type does not require the surviving spouse to pay annual distributions. The surviving spouse of a marital gift trust can also name new beneficiaries after the death of the original settlor.
As the surviving spouse is never the true owner, a lien cannot be exercised on the property within the trust or on the trust itself.
Benefits of a QTIP
Although RAQTs are similar to marital trusts, there are advantages in certain situations.
- You control where assets end up: You decide to whom your property is transferred after your death and that of your spouse. This means that no matter what your spouse does after you die, any remaining assets in the trust pass to the secondary beneficiaries you name. These may be your children, grandchildren or children from a previous marriage.
- QTIPs protect all assets and income: As your spouse ages, they may not be able to make the sound financial decisions they once could. Saying how income or principal is distributed and used protects the assets of any beneficiaries you name. Your assets cannot be viewed by thieves or crooks, accidentally signed, or used in ways you did not intend them to be used.
How does a QTIP trust work?
A RAQT trust is an irrevocable trust that pays the income generated by the assets to a spouse. On the death of this spouse, the assets pass to the beneficiaries designated by the settlor.
What is the difference between a QTIP and a marital trust?
The two are similar, except that a RAQT cannot be changed by the surviving spouse and requires at least one annual distribution to occur.
What are the requirements of a QTIP Trust?
A RAQT is required to pay all of its income to the beneficiary spouse. Nor can there be other beneficiaries until the death of this spouse.
Qualified bridging interest trusts are designed to be a method of ensuring that you can leave assets to your spouse and other named beneficiaries while the terms you want are enforced throughout the life of the trust.
QTIPs may not be suitable for everyone or for all situations. For example, if you are not concerned about the distribution of your estate after the death of your spouse, you may not need a RAQT. But if you leave an estate to your spouse when you die and want all remaining assets and income to go to specific people after your spouse dies, a RAQT is a great way to make sure your wishes are carried out.
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