Many Ilinois residents combine various financial instruments when devising their estate plan, including trusts. One of the lesser-known trusts is a qualified terminable interest property (QTIP) trust. Is this type of trust right for your situation?
What is a QTIP trust?
A QTIP trust allows you to leave money for your spouse following your death to ensure that they are taken care of for the rest of their life. As an estate planning tool, it allows you to specify how the income from the trust, and sometimes the principal, will be given to the surviving spouse. After the surviving spouse’s death, the remaining funds are distributed to heirs you have designated.
QTIP trusts have several benefits that make them attractive. They are irrevocable, meaning you cannot change their terms once established. However, you may find them particularly useful if you have a spouse who will most likely survive you but has shown signs of dementia and may be unable to make their own financial decisions. Other benefits include:
- Specifying heirs when you have beneficiaries from a previous marriage
- Limiting applicable death and gift taxes
- Property only becomes taxable after the second spouse’s death
How is QTIP different from a marital trust?
The major difference between a QIP and a marital trust is that control of the latter passes to your spouse upon your death. When establishing a QTIP, you must name at least one trustee for estate administration to ensure that assets are distributed according to your wishes.
As with other irrevocable trusts, you can use these financial instruments in conjunction with revocable trusts and different types of accounts to craft an estate plan. Carefully consider what assets you want to put into each one, and update your estate plan when appropriate.