A qualified terminable interest property trust is a special type of irrevocable trust that is usually created after a spouse’s death. The deceased spouse transfers a large amount (or all) of their estate into a trust, allowing the surviving spouse to draw income from it for the rest of their life.
The principal value of the trust property remains untouched, as it is designated for beneficiaries other than the surviving spouse.
This arrangement allows the transfer into the trust to qualify for an unlimited spousal gift. After the surviving spouse passes, the beneficiaries receive distributions from the trust’s principal assets.
Qualified terminable interest property trusts can be useful for families that want to ensure that certain assets will be guaranteed to go to children or other loved ones. The trust also provides supportive income for the rest of the surviving spouse’s lifetime, demonstrating a commitment that cannot be broken by death.
Talk to an Albuquerque qualified terminable interest property trust lawyer to learn more about how these arrangements could benefit your family. Schedule a no-obligation consultation with New Mexico Financial Law today when you call us at 505-503-1637 or contact us online.
Qualified terminable interest property trusts are less flexible than most types of trusts. While they are usually not formed until the death of a spouse, this moment can come faster than people expect.
Once the trust is created, it is irrevocable.
Accordingly, families must be careful to ensure that the trust’s instructions will result in an arrangement that will keep all parties satisfied. They should also review their trust and estate plans every few years or after any major financial or life changes.
An Albuquerque qualified terminable interest property trust attorney can help you examine all of the most important factors for trust formation and recommend personalized strategies. With their support, you can decide how you might answer questions like the following:
Many times, assets used to fund a qualified terminable interest property trust start off within a living trust, so your family may want to begin the process of making trust arrangements now. Even if you intend to create your qualified terminable interest property trust through your will, though, making estate plans now is critical.
New Mexico Financial Law can review your current estate plans alongside your asset portfolio and other unique situational factors. We will also listen closely to your goals for the future, including the advantages you want to obtain by forming a qualified terminable interest property trust.
Your Albuquerque trust attorney can then suggest possible trust arrangements that could accomplish your goals while taking your unique finances and life situation into account.
A qualified terminable interest property (QTIP) trust is an irrevocable trust that is usually (but not necessarily) formed after someone’s death. The creator of the trust (known as a grantor, settlor, or trustor) agrees to transfer assets they own into the trust at the chosen time.
These assets could either reside in their estate or within a trust they created during their lifetime.
When the QTIP trust is formed, a trustee takes over the management of the trust and its assets. The trustee is responsible for ensuring that the trust is managed soundly, according to the rules created by the grantor.
They must also make distributions from the trust to its beneficiaries.
QTIP trusts have two categories of beneficiaries: an income beneficiary and remainder (or residuary) beneficiaries. The income beneficiary receives distributions from the trust first, giving them a steady income stream for the remainder of their life.
When this primary beneficiary dies, the remainder beneficiaries receive what’s left in the trust, according to the rules set by the grantor. For example, they each may inherit a set monetary value from the trust’s assets, receive specific assets regardless of their present value, or divide assets amongst themselves according to a certain ratio.
The QTIP trust was created primarily to benefit married couples, in a similar arrangement to a marital trust.
With a marital trust, the grantor spouse passes along all assets to the survivor spouse and does not nominate any beneficiaries to receive the remainder amount. Instead, the survivor is allowed to do whatever they want with the trust’s assets, including naming their own beneficiaries.
This arrangement allowed transfers to the trust to qualify for a marital deduction from estate taxes.
Since 1982, the marital deduction has been unlimited, meaning that transfers to the trust incurred no estate tax. However, when the survivor died, the beneficiaries they named could end up paying estate taxes, depending on how much is left in the trust.
These marital trust arrangements have one problem: the surviving spouse has the right to use up all of the assets in the trust. If the couple had originally intended to leave assets to their children (or other loved ones, including grandchildren), then there was nothing within the trust rules that could prevent this.
In response, some families instead switched to using a qualified terminable interest property trust. These trusts did not allow the surviving spouse to touch the principal.
Instead, the trust pays out income to the surviving spouse. This arrangement allows the trust itself to qualify as a “terminable interest” under IRS rules for a completed spousal gift.
Estate taxes may be charged on transfers from an estate that exceeds the original asset owner’s lifetime exemptions. These taxes are normally charged to the estate itself.
If the estate assets are transferred via a will, the personal representative of the estate (i.e., the executor) has to pay the estate taxes before anything is paid out to heirs. The representative may have to liquidate some estate property, accordingly, so that they can pay for these taxes in cash (the IRS does not accept transfers of other assets or property, in most cases).
With a trust, estate taxes will be assessed when the beneficiary receives their distribution — making it a “completed gift.” Accordingly, the beneficiary may be charged some percentage of the transfer.
Put more simply: if you use a will, taxes are paid before assets go to an heir, whereas in a trust, taxes are paid by the beneficiary when they finally receive their distribution.
The surviving spouse does not pay any estate taxes, in nearly every case, whenever they inherit property through a QTIP trust. However, when the surviving spouse dies, the beneficiaries could.
Now, some good news: the lifetime estate tax exemption amount in 2025 is $13.99 million. This applies to each spouse, for a grand total of $27.98 million.
When funding a QTIP trust, the grantor spouse does not use up any of their remaining exemption since marital gifts do not count towards this amount.
If the surviving spouse is at risk of exceeding their own lifetime estate tax exemption amount, there’s more good news: portability rules allow them to combine their exemption with any remaining exemption left over from their most recently deceased spouse.
Because of these rules, only ultra-high-net-worth couples would be at risk of triggering estate taxes through a QTIP trust arrangement.
With that said, capital gains and income taxes do apply to the final beneficiaries. Some of these taxes will be deferred from the income received by the surviving spouse.
Accordingly, the trustee should diligently record all taxable income and capital gains for the trust each year.
Another important quality of a QTIP trust (which also applies to a marital trust) is the step up in basis. This terminology refers to an adjustment of the value of an asset at the time of the original owner’s death.
If, for example, a home was purchased for $100,000 forty years ago and it is now worth $600,000, the person inheriting the home would receive it as if it was originally bought at $600,000. If they sold the home immediately, they would likely not owe any capital gains taxes.
A QTIP trust counts as a transfer from the deceased spouse to the surviving spouse, allowing it to qualify for a step-up in basis. Then, when the surviving spouse dies and transfers the trust remainder to beneficiaries, another step up in basis is allowed.
This somewhat unique trait of these trusts makes them advantageous, even in an era with an ultra-high estate tax exemption.
Some QTIP trusts may be formed as a testamentary trust, which means that the estate’s personal representative takes some (or all) of the decedent’s assets and uses them to create a new, irrevocable trust. When this happens, though, the estate’s assets could be subject to creditor claims and other estate expenses before they are transferred to the trust.
To avoid estate claims and expenses, while avoiding having the assets go through probate, in general, many couples go ahead and form a joint living trust. When one spouse dies, they can take some community property along with separate property and use it to fund an irrevocable QTIP trust.
How this usually works is that the joint living trust splits into two trusts after the first death of a spouse: an A trust (the QTIP or marital trust) and a B trust (also sometimes called a bypass trust, credit shelter trust, or residuary trust).
When estate tax exemptions were much lower, the decedent spouse would use up 100% of their lifetime exemption to fund the B trust. Since the A trust would otherwise result in estate taxes if it immediately went to children or other non-spousal beneficiaries, it instead goes to the surviving spouse, deferring estate taxes until they die.
These days, with much higher exemption limits, there may be less use for an A/B trust structure. Nevertheless, there are a few advantages to QTIP trusts that make them still worth considering, especially for blended families.
QTIP trusts solve a major problem that can happen after a spouse dies and their survivor inherits everything without a protective trust arrangement: what happens to the assets now?
The surviving spouse has the right to spend 100% of them. Or, more likely, they could get remarried and decide to split the assets between their old and new families.
In some cases, they may end up disinheriting their old family, altogether.
With a QTIP trust, the assets are preserved and nigh untouchable. In some cases, the surviving spouse may be able to receive distributions from the principal, at the trustee’s discretion, however. This is referred to as a power of appointment.
If the couple would like to have this arrangement made, they may want to appoint a non-interested third party as trustee, rather than the surviving spouse.
Creating a qualified terminable interest property trust in Albuquerque can provide many advantages for your family. They set up a surviving spouse with a lifetime of income while preserving hard-earned assets for the next generation.
They can keep things from getting complicated with blended families, especially in situations where members of the new family face financial pressures.
Getting peace of mind requires planning ahead, though, and that’s exactly what we at New Mexico Financial Law help you do. Find out more about how we can help when you call us at 505-503-1637 or contact us online to book a free consultation today.
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