Qualified Terminable Interest Property (QTIP) Trust
What it is:
A qualified terminable interest property (QTIP) trust allows a grantor to provide for a spouse after death but retain control of how the trust's assets are distributed after the spouse dies.
How it works (Example):
For example, let's say John establishes a QTIP trust with $4,000,000 in it. He is a big Oregon Ducks supporter and fan. His wife loves the ballet. They have one child. Eventually, John dies. His spouse, Jane, survives him and in accordance with the QTIP trust receives income from the trust for the rest of her life. Jane remarries. Her new husband is also a ballet lover and has three children from a previous marriage.
When she dies, Jane would love to split the trust (which is still worth about $4,000,000 thanks to capital gains) among her child, her new husband's children, and to the ballet that she and her new husband have supported for ten years. However, John is able to control the money "from the grave" thanks to the QTIP trust. He is able to prevent his estate from passing to Jane's second husband and the second husband's heirs. Thus, the $4,000,000 goes to John and Jane's child and to the Oregon Ducks Scholarship Fund. Only then is estate tax assessed on the property in the trust.
Why it Matters:
QTIP trusts are a way to ensure that a spouse is taken care of after the other spouse's death, but they also allow grantors to control how the assets are distributed after the surviving spouse dies. QTIP trusts get their name by being exceptions to the general rule that terminable interests (that is, an interest in property that can expire due to some event occurring or not occurring) do not qualify for the marital deduction (the marital deduction allows spouses to transfer any amount of property between themselves without paying estate or gift taxes).