A QTIP trust, despite its silly name, is a valuable estate planning tool. QTIP, or “Qualified Terminable Interest Property” is a name derived from the tax law that legalises the tax benefits of the trust. When property is given to a spouse outright (not subject to a trust), it qualifies for what is known as a “marital deduction.” In layman’s terms, the property transfers to the spouse free of estate or gift tax. For various reasons, sometimes, it isn’t ideal to give assets outright to a spouse. This can create complications in estate planning, because gifts in trust typically do not qualify for the marital deduction.

A QTIP trust is a special type of trust that can be used to transfer assets in trust to a spouse free of tax during life, or more commonly, at death. When a trust is drafted to meet the requirements delineated in the tax law, it qualifies as a QTIP trust and receives the same marital deduction treatment as if the property was given outright. This type of trust is very important when planning for blended families, or for creditor protection where families are facing estate tax. The special QTIP trust can save the day.

Legally, to qualify as a QTIP trust, the trust is required to pay all of its income to the spouse beneficiary, and there can’t be any other beneficiaries during that spouse’s lifetime. This allows couples to ensure that a spouse is taken care of financially. However, the manner and extent to which the underlying trust assets are distributed, and when, is customizable. The trust is often drafted to control how the trust’s remaining assets are distributed once the beneficiary spouse dies. This is helpful when a couple wants to ensure that their other beneficiaries (usually children from this marriage or a prior marriage) will receive an inheritance on the death of the spouse. This control element also protects the trust assets from the claim of an elective marital share in the event of remarriage without a prenuptial agreement.

Likewise, a QTIP trust can be drafted as a spendthrift trust, such that the assets in the trust are protected from creditors of the beneficiary spouse (from accident victims, to credit card companies, to future divorce). This makes intervivos QTIP trusts a valuable tool for making lifetime gifts of assets protected from creditors. Testamentary QTIP trusts (those taking effect at death) offer the same benefits for the beneficiary spouse.

As with other types of estate planning, QTIP trusts must be specifically tailored to each client’s situation.