What is a QTIP Trust?

A QTIP trust, which stands for "Qualified Terminable-Interest Property" is designed to provide income for your surviving spouse for the rest of her life, and then ensures that your children get the remaining principal when she dies. This is an excellent tool to use to protect your spouse and your children in making sure that they get an inheritance too.

One example of why you would wan to use a QTIP trust would be if your wife has children from a previous marriage, and you want to make sure that your money eventually goes to your kids, and not to hers. However, you still want to be sure that she is taken care of for the rest of her life, and that she has plenty of income to live on. This type of trust is designed to do that.

Another example would be to protect your spouse from the risk of her re-marrying someone who is a gold-digger, or is just marrying her for her money. I had a client one time who's husband died and left her a sizable estate from an life insurance policy. A few years later, she remarried. She soon gave her new husband trading authority on her brokerage accounts and he started trading like a mad man. She was also taking money out of the accounts left and right. Her new husband was telling her that he was making a lot of money from his trading. But in reality, he was not. He also told her that the new BMW he just bought her was from trading profits that he had made when in fact, there weren't many profits at all. This was a very difficult situation because she completely trusted him and had no reason to believe that he would be dishonest.

A QTIP trust will protect your spouse from someone like this coming in and wrecking her financial future.

So how does it work?

Upon the death of the first spouse, assets are transferred into the QTIP trust and held there. The surviving spouse can take the income from the assets, but cannot touch the principal. When the second spouse dies, the remaining principal is passed on to the children.

These 4 conditions must be met

1. The deceased spouse must make a transfer of property. The transfer can be done in trust or through life insurance proceeds, etc.

2. The surviving spouse must be given the right to all the income. The income must be paid at least annually, and the surviving spouse must be entitled to that income for life.

3. No one can be given the right to direct that the property will go to anyone but the surviving spouse as long as her or she is alive.

4. The first spouse to die's executor must make an irrevocable election on the decedent's federal estate tax return. The election provides that, to the extent the QTIP property has not been consumed, its date-of-death value (at the surviving spouse's death) will be included in the surviving spouse's estate.

One problem that can occur is if you have property that doesn't generate income at all. This would include closely held private stock, or some real estate. The surviving spouse must be given property that can reasonably be expected to produce income. Most closely held stock doesn't pay dividends.

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