A QTIP trust can provide lifetime income for a surviving spouse while directing the remaining property to beneficiaries chosen in the estate plan. It is often considered when someone wants to support a spouse and also preserve an inheritance for children from an earlier relationship.
QTIP stands for qualified terminable interest property. The label concerns federal marital-deduction treatment; the trust’s actual terms determine the spouse’s rights, the trustee’s powers and the remainder beneficiaries.
Decide what the trust should accomplish
Start with the family and assets, not a tax acronym. How much support will the spouse need? Should principal be available for medical care or housing? Who should receive what remains? Would a house, concentrated investment or closely held business make it difficult to provide income?
For Austin, Cedar Park and other Texas families, community-property ownership must also be considered. One spouse’s estate plan cannot simply direct property belonging to the other spouse.
Income, principal and the trustee
For federal QTIP treatment, the surviving spouse generally must have a qualifying income interest for life, including entitlement to all income at least annually. During that spouse’s life, no person may have a power to appoint the property to someone other than the spouse. The required election must also be made.
The document may allow principal distributions for the spouse under specified standards. Those distributions affect what remains for children. The trustee must administer the actual terms, maintain records and balance the interests the document creates; the arrangement does not eliminate the possibility of disagreements.
Tax deferral requires more than the trust’s name
Qualifying property can receive marital-deduction treatment when the relevant requirements and election are satisfied. This generally defers estate taxation of that property rather than eliminating it; qualifying elected property is generally included in the surviving spouse’s gross estate at death. Tax results depend on the estate, elections and law in effect.
Ask the estate’s tax adviser about the QTIP election, any partial election and coordination with portability. Do not assume that creating the trust automatically makes every required tax filing or preserves every exemption.
Control depends on the drafting
A trust can restrict the surviving spouse’s ability to redirect the remainder. But it is too broad to say every QTIP trust always fixes the final beneficiaries or can never be changed in any respect. Powers of appointment and permitted modification mechanisms require careful review. The document should state the intended flexibility and limits.
Likewise, do not assume automatic creditor protection or immunity from family disputes. Ownership, distributions, trust provisions and applicable law matter.
Questions to resolve before signing
- Who will be trustee, and who can replace that person?
- How will the spouse use a residence or receive adequate income?
- When may principal be spent?
- What information will the spouse and remainder beneficiaries receive?
- How will administration and tax-return costs be paid?
- How do existing beneficiary designations and business agreements fit?
A trust created or funded through a will may still require probate. A lifetime trust must be properly funded to accomplish the intended nonprobate transfer. See our trust funding guide.
Tax sources: IRS Form 706 instructions, including Schedule M and Internal Revenue Code Sections 2044 and 2056.
Discuss your estate plan
Contact Massingill to discuss your goals, existing documents and the property involved. We will explain the proposed scope and fee before work begins.
Joshua Massingill
Joshua Massingill is an attorney practicing in Austin, Texas. He serves on the Texas State Bar’s Law Practice Management Committee, the Leander Educational Excellence Foundation (LEEF) Board of Directors, and the Success-Werx Board of Advisors. He mentors young entrepreneurs in Leander ISD’s INCubatorEDU program and is active in his church.