QTIP trust is a type of trust and an estate planning tool used in the United States. “QTIP” is short for “Qualified Terminable Interest Property.” In the U.S., each citizen is granted a credit against the gift and estate tax. When gifts and inheritances exceed the amount of this credit, a tax is imposed.
For estate tax purposes, any property which passes to a decedent’s surviving spouse is not subject to the gift or estate tax; however, generally full ownership of this property must in fact pass to the surviving spouse. A QTIP Trust is an exception to this general rule. Under Section 2056 of the Internal Revenue Code, as long as the surviving spouse has a lifetime income interest in the property, the property is treated as passing to the surviving spouse.
For example, if a Grandma gives $100,000 to Grandpa, this would be a gift to a spouse, exempt from the gift and estate tax. However, if Grandma were to give the $100,000 to Grandson, this would be included for gift and estate tax purposes. However, Grandma can place this $100,000 in a QTIP trust which will make payments of money to Grandpa during his life, and have the money in the trust pass to Grandson when Grandpa dies. This is treated as a marital gift to Grandpa, exempt from the gift and estate tax, to the extent of any property received. Grandson, however, will ultimately receive a taxable gift when the money in the trust passes to him.
QTIP trusts are commonly used when a spouse has children from another marriage. The other spouse may wish to provide for this spouse, but nonetheless designate where the money will go after that spouse is deceased. A QTIP trust allows this to be accomplished in a manner treated as a gift to a spouse.