A Qualified Terminable Interest Property (QTIP) trust is a type of trust that allows the grantor to provide for a surviving spouse during their lifetime but maintain control over the trusts principal assets so they may be distributed to the decedent's chosen beneficiaries after the surviving spouse has also died. QTIP trusts are very similar to the A–B trust arrangements outlined normally in credit shelter and marital deduction trusts but are also slightly more restrictive. A QTIP trust usually provides a life estate type benefit to the surviving spouse so they will receive the income from the trust and the right to use any real estate that is contributed to the QTIP trust. It is very important to talk to a Montgomery County estate lawyer about your options in this realm of estate planning.
Unlike other trusts in the A–B type arrangement however, the surviving spouse does not have any other control over the property and is not allowed to have discretionary distributions from the trust principle that exceed the greater of $5000 or 5% of the trust assets (although even those may be disallowed by the grantor).
Most commonly, QTIP trusts are used by those who have been married previously and wish to leave some benefit in the right to use property to their second or third spouse while leaving the trust assets themselves to their children from their first marriage. The surviving spouse is unable to spend down or sell assets contained in a QTIP trust, nor can they assign the property to another individual they may choose to designate a beneficiary for other property the surviving spouse may own themselves. Essentially, it gives the first spouse to die control over the assets to ensure they ultimately end up in the hands of those they choose rather than through the discretion of the surviving spouse or anyone else. QTIP trusts continued to remain popular, specifically with those who seek control over the trust assets following their death. The additional benefit of a QTIP trust is that the assets passing to the trust, so long as they provide all the income and very limited distributions of principle to the surviving spouse, still call five for the marital deduction. This means that the assets pass free of tax like anything else going to the surviving spouse, and then is state taxes are assessed as necessary after the death of the surviving spouse. The assets are also protected from creditors in any new husband or wife that could enter the picture after their death because the surviving spouse does not have the right to invade that principle except in limited circumstances and for limited amounts.