QTIP (qualified terminable interest property) trusts are valuable tools in estate planning. Here’s how they work:
* The first spouse to die leaves assets to a QTIP trust. The surviving spouse gets income from the trust as long as she’s alive. If needed, the trustee can distribute additional funds to the survivor. Assets left to a QTIP trust avoid estate tax on the first death.
* When the second spouse dies, any assets left in the trust are included in her taxable estate.
* The assets in the trust at the survivor’s death go to beneficiaries named by the first spouse to die, not by the survivor.
Thus, QTIP trusts frequently are used in remarriages because they enable the older (and often wealthier) spouse to exert post-mortem control. The surviving spouse gets cash flow for life while the trust creator’s children from a previous marriage get any assets remaining in the trust at the survivor’s death.