QTIP Trust
A QTIP trust — Qualified Terminable Interest Property trust — is an estate planning vehicle that provides income to a surviving spouse during their lifetime while preserving the principal for beneficiaries of the deceased spouse’s choosing. It is the primary tool for balancing marital security against inheritance control in blended families and large estates.
What It Is
When one spouse dies, assets passing to the surviving spouse qualify for the unlimited marital deduction — no estate tax is owed on transfers between spouses at death. But the marital deduction normally requires that the surviving spouse receive an outright bequest or an interest with full control over the assets. A QTIP trust modifies this: it qualifies for the marital deduction even though the surviving spouse does not control the principal.
In a QTIP trust, the surviving spouse receives all income generated by the trust assets for life. This income interest is mandatory — the trustee cannot withhold income distributions. The surviving spouse may also receive principal distributions at the trustee’s discretion, depending on how the trust is drafted. But the surviving spouse does not control who ultimately receives the trust principal at their death. That decision was made by the deceased spouse and is locked into the trust instrument.
The executor of the deceased spouse’s estate makes the QTIP election on the estate tax return. The election qualifies the trust for the marital deduction, deferring estate tax until the surviving spouse’s death, at which point the trust assets are included in the surviving spouse’s taxable estate.
QTIP trusts are essential in second-marriage situations. A person who has children from a prior marriage wants to provide for the new spouse but ensure that their assets ultimately pass to their own children rather than to the new spouse’s family. A QTIP trust accomplishes exactly this: the new spouse is supported for life; the deceased spouse’s children receive the remainder.
Etymology
QTIP is a pure acronym derived from the Internal Revenue Code section that created the vehicle — specifically IRC Section 2523(f) for gift tax purposes and Section 2056(b)(7) for estate tax. The “qualified terminable interest” language refers to the technical tax concept: the surviving spouse’s interest terminates at death (a “terminable interest”), but the QTIP election qualifies it for the marital deduction despite this termination.
A Concrete Example
A 65-year-old widower with a $10 million estate and three adult children from his first marriage remarries. He wants to provide for his new wife but ensure the estate ultimately passes to his children. His estate plan creates a QTIP trust funded at his death with the bulk of his estate. His wife receives all trust income — dividends, interest, rent — for life. At her death, the trust principal passes to his children. The estate qualified for the marital deduction at his death; his estate is included in hers and taxed at her death.
Common Misconception
Many people assume the surviving spouse in a QTIP arrangement has no financial security because they cannot access the principal. In practice, QTIP trusts are often drafted with discretionary principal invasion provisions for health, education, maintenance, and support — the standard HEMS standard in trust law. The surviving spouse may receive substantial principal distributions for legitimate needs. What they cannot do is redirect the principal to their own estate or their own beneficiaries. Security and control are separated; the QTIP provides the former while denying the latter.