A QTIP trust, or Qualified Terminable Interest Property trust, is a type of irrevocable trust commonly used in estate planning to provide for a surviving spouse while still maintaining control over the ultimate distribution of assets. This trust allows an individual to provide for their spouse financially while ensuring that the assets ultimately pass to other beneficiaries, often children from a previous marriage or other family members.
What is the relationship between a QTIP trust and a revocable living trust?
Revocable Living Trust:
A revocable living trust is a flexible estate planning tool that allows the grantor to retain control over their assets during their lifetime. The grantor can amend, revoke, or terminate the trust as they see fit.
Relationship:
A QTIP trust is often created within the framework of a revocable living trust at the death of the first spouse. The revocable living trust may serve as the primary estate planning document, and within it, provisions for the creation of a QTIP trust can be included. This allows the grantor to maintain control during their lifetime while ensuring the desired distribution of assets upon the death of the surviving spouse.
The funding of a QTIP (Qualified Terminable Interest Property) trust within the context of a Revocable Living Trust typically occurs upon the death of the first spouse.
What is the Purpose of A QTIP Trust?
Income for the Surviving Spouse:
The surviving spouse is required to receive income generated by the trust assets for the remainder of their life.
Principal Preservation:
The principal (the original assets transferred to the trust) remains intact. Principal distributions to the surviving spouse are optional within the terms of the trust.
Ultimate Distribution:
Upon the death of the surviving spouse, the remaining trust assets pass to the ultimate beneficiaries designated by the deceased grantor.
Here's a general sequence of events when a QTIP Trust is involved:
Creation of Revocable Living Trust:
The grantors establish a Revocable Living Trust during their lifetime and transfer assets into the trust.
Lifetime of the Grantors:
During the grantors' lifetime, they retain control over the assets in the Revocable Living Trust. They can make changes and amendments or even revoke the trust if desired.
Death of the First Grantor:
Upon the death of the first grantor, the provisions of the Revocable Living Trust come into effect. The deceased spouse's interest in the assets goes into one or two irrevocable trusts, and its terms dictate the distribution of assets.
Creation of QTIP Trust:
If the Revocable Living Trust includes provisions for the creation of a QTIP trust, those provisions come into play upon the death of the first grantor. The trust document should specify that a QTIP trust is to be established, and it should outline the terms of this trust.
Funding the QTIP Trust:
After the first grantor's death, the designated trustee, following the instructions in the Revocable Living Trust, funds the QTIP trust with the assets specified for that purpose. These assets are typically chosen to provide income for the surviving spouse (since income distributions are required). It is optional on whether to provide access to principal from these assets. while preserving the principal for ultimate distribution to other beneficiaries upon the death of the surviving spouse.