Qualified Terminable Interest Property Trust (QTIP)

Qualified terminable interest property trusts (QTIP) allow donors / settlors to provide a spouse with a source of income while at the same time maintaining control over the final distribution of the assets in the trust. This type of trust is oftentimes established by individuals that have children from a prior marriage.

Initially, the trust provides the surviving spouse with a source of lifetime income. When the surviving spouse dies, the trust's corpus, or principal, is transferred to a beneficiary as designated by the donor. The surviving spouse does not determine how the trust's assets are distributed after their death; this decision is made by the donor. This type of trust is frequently used by donors that want to ensure the trust's assets are passed onto their children. One example of how a QTIP protects the donor's ultimate beneficiaries includes:

• The donor has children with a former spouse and is remarried. They would like to provide income to their current spouse, but would also like to ensure the children from their prior marriage inherit the trust's assets when their spouse passes away.

Since the donor initially designates their spouse as the beneficiary of the trust, the assets placed in a qualified terminable interest property trust qualifies for marital deductions. This means the assets are not subject to estate taxes when the donor passes away. However, the assets are subject to applicable taxes when the surviving spouse passes away, and they are transferred to the trust's ultimate beneficiaries.

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