In Indiana, a qualified terminable interest property (QTIP) trust is an estate planning tool that allows individuals to provide life-long income for their surviving spouse while maintaining control over the final distribution of their assets. Understanding the aspects of a QTIP trust is essential before deciding if this approach makes sense for you.
QTIP trust specifics
A QTIP trust lets an individual control what happens to their assets if their spouse outlives them. Upon the first spouse’s death, the assets in the QTIP trust support the surviving spouse.
However, the surviving spouse cannot name their own beneficiary to receive the assets when they die. The grantor, or spouse who set up the trust, already chose the beneficiaries who would receive the assets after the passing of the second spouse.
The trust is irrevocable; no one can alter the directives once the account funds. A QTIP trust takes effect once the grantor of the trust dies.
The purpose of a QTIP
One of the advantages of establishing a trust as a QTIP is ensuring that a surviving spouse is financially taken care of while protecting the inheritance in case the spouse remarries or has other children.
A QTIP trust can also reduce estate taxes for larger estates. A trust can be complex and requires the trustee to file tax documents and manage the trust’s assets according to the grantor’s directives.
Some pros and cons of QTIP trusts
A well-designed QTIP trust should provide an income for the surviving spouse for the rest of their life. It also protects an inheritance intended for specific beneficiaries, which the surviving spouse cannot change. While these are a benefit, in some cases, they can become disadvantageous. Since the trust is irrevocable, the trust cannot be changed even if financial circumstances change while both spouses are alive.
The surviving spouse is limited to receiving income from the trust’s assets, such as real estate and income-producing stocks and bonds. They can live in a house but not sell it. The spouse also has no access to any other principal in the trust. The final beneficiaries receive the principal and property once the second spouse dies.
A QTIP trust is a powerful estate planning tool. It’s essential to consider your specific circumstances to decide if a QTIP trust is the right choice for your estate planning needs.