When people think about estate planning, they may think about creating a will or a trust. A person interested in creating a trust, however, should know that they have many options to choose from since multiple types of trusts exist.
One trust that estate planners may find useful is the qualified terminable interest property trust, also referred to as a QTIP trust. This trust can be created via a will and then becomes effective when the person who established it dies.
Who is the beneficiary of a QTIP trust?
As explained by Policygenuis, a person establishing a QTIP trust names two types of beneficiaries. The first is the lifetime beneficiary and the second is the final or remainder beneficiary.
A lifetime beneficiary receives income from the trust for the duration of their life but has limited access to or control over the actual assets in the trust. The final or remainder beneficiary inherits the trust assets upon the death of the lifetime beneficiary.
Some remarried spouses find qualified terminable interest property trusts useful as they allow them to provide income for their surviving spouse while ensuring a legacy for their children or grandchildren from their first marriage.
How do estate taxes work for QTIP trusts?
According to Forbes, another unique feature of the QTIP trust relates to taxes. When the lifetime beneficiary is the surviving spouse, no estate taxes are assessed upon the death of the creator of the trust. Instead, all taxes are deferred until the surviving spouse dies. This happens due to the marital deduction, providing unlimited exemption from estate taxes at the time of the first person’s death.