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Simple English definitions for legal terms
Qualified Terminable Interest Property (QTIP) Trust
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A quick definition of Qualified Terminable Interest Property (QTIP) Trust:
A Qualified Terminable Interest Property (QTIP) Trust is a way for married couples to transfer property to each other without incurring gift or estate taxes. Normally, giving property to a spouse doesn't trigger taxes, but if the property is only given for a limited time, it can be subject to taxes. A QTIP Trust allows one spouse to give property to the other spouse for their lifetime, and then to other beneficiaries after the surviving spouse passes away. The surviving spouse can receive income from the trust, but can't change who the beneficiaries are. The trust must follow certain rules to qualify for tax benefits, but if done correctly, it can help the surviving spouse keep more of the property without paying extra taxes.
A more thorough explanation:
A Qualified Terminable Interest Property (QTIP) Trust is a type of estate planning tool that allows a couple to maximize their applicable exclusion amounts while qualifying for the marital deduction. When property is transferred to a spouse, it usually does not trigger gift or estate taxes under the marital deduction. However, if the property interest is terminable, it may not qualify for the marital deduction and may be subject to gift and estate taxes. A QTIP Trust is an exception to this rule.
A QTIP Trust allows the surviving spouse to benefit from the trust and qualify for the marital deduction if certain guidelines are followed. The 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. 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.
Here is an example of how a QTIP Trust works:
John and Jane are a married couple with a combined estate worth $10 million. They want to ensure that their assets are distributed according to their wishes and that their surviving spouse is taken care of after they pass away. They decide to create a QTIP Trust. John sets up the trust and transfers $5 million into it. The trust is set up to pay Jane income from the trust assets during her lifetime. After Jane passes away, the remaining trust assets will be distributed to their children according to John's wishes.
In this example, the QTIP Trust allows John and Jane to maximize their applicable exclusion amounts while still qualifying for the marital deduction. The trust ensures that Jane will be taken care of during her lifetime and that the remaining assets will be distributed according to their wishes.