What Is a QTIP Trust?

The qualified terminable interest property or QTIP trust, also known as the "C" trust, gives the grantor the ability to elect the ultimate beneficiaries after passing to the spouse's estate under the unlimited marital tax exemption. It's important to know that the assets that transfer to the surviving spouse will become part of the spouse's gross estate while diverting from having to pay taxes upon transfer at death or thereafter. Note, the QTIP trust will not permit a non-U.S. citizen spouse to qualify for unlimited marital deduction.

In order to qualify as a QTIP trust the property transferred to the trust must first be in the gross estate of the first-to-die grantor spouse and then must transfer to the surviving spouse. The grantor spouse must file an election for the QTIP trust on form 706, the estate tax return. The surviving spouse then becomes a beneficiary to the income which must be paid annually. Additionally, the surviving spouse must have the authority to choose income-producing assets within the trust as opposed to non income-producing assets. The surviving spouse is also appointed rights to the property in the trust; no one else can be appointed to have rights to the property.