A QTIP (Qualified Terminable Interest Property) trust postpones, but does not eliminate, estate taxes on property that one spouse bequeaths to the other. It's a revocable trust, which means that it's a legal entity capable of owning property, and that it can be changed or altered during the grantor's lifetime.

The QTIP grants a life interest to the surviving spouse, who is entitled to receive income from the trust regularly and make use of any trust assets, such as a house, within any restrictions of the trust document. The spouse is also allowed to spend trust principal to any extent that's allowed by the trust. The grantor of the trust names beneficiaries who will inherit the trust assets when the surviving spouse dies. Upon the death of the survivor, the net value of the property in the QTIP is included in the survivor's taxable estate. QTIP assets don't go through probate at either the grantor's or the surviving spouse's deaths.

The QTIP is only used by couples, and then generally only by those couples whose combined estates exceed their combined estate exemptions. It's usually used so that one, or both, spouses can be absolutely sure that his or her property will eventually go to their specifically-designated beneficiaries, with the surviving spouse having no power to alter it. The most common situation for the use of a QTIP is when a prosperous spouse has children from a previous marriage.

Many couples, particularly those in first marriages, have no need or interest in the goals of a QTIP. For instance, if the couple owns most or all of their property together and wants the same people - usually their children - to inherit it, then there is no concern for what a QTIP is designed to do, which is to let each spouse control the final disposition of his or her own property. For couples who have the same beneficiaries, the QTIP offers no advantage; they would possibly be better served with a different estate planning vehicle - an AB trust, for example - and leave any amount which exceeds the estate tax exemption to the surviving spouse outright. This is possible, again, due to the marriage deduction.

It's important to remember that because the QTIP does not eliminate taxes, the full value of the trust property (as of the date of the surviving spouse's death) is included in the surviving spouse's taxable estate. If the property has significantly increased in value, more estate tax could be due than if the property had simply been included in the estate of the spouse who was first to die.

The IRS requires that the executor of the QTIP grantor's estate must choose, on the federal estate tax return, to have all or part of the trust be treated as a QTIP. This means that even though the QTIP is set up to take effect upon the grantor's death, the final decision concerning whether the QTIP becomes operational rests with the trust's executor, not the grantor. If the executor doesn't make the election properly, the QTIP does not become valid.

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