Divorce is prevalent in society. Older couples married for the second time often have their own children from a first marriage. Each wants to bequest things to their own children. Each in the couple may have his (her) own assets but one main asset might be owned by one of them. More often than not, that’s the house they’re living in. How can that house owner assure that his house goes to his children of a previous marriage while making sure his present spouse will always have their house to live in?


With the automatic way probate laws work, the spouse who dies earlier may lose all control of where his assets end up. Present spouses may not be on good terms with their spouse’s children. So, spousal promises to carry out wishes may wear thin as the years pass beyond a spouse’s death.


There is one device, though, by which a spouse can assure that his house will pass to his own children but after his present spouse dies. And that’s called the qualified terminal interest property trust (QTIP). He simply creates the QTIP trust making his own children the ultimate beneficiaries of it. His spouse benefits while she lives but her interest in it is terminated at her death.


The house-owning spouse funds the QTIP trust with assets that qualify for the unlimited marital deduction. This would include the house as well as anything else he chooses.  Any income that is generated in the trust must be paid to his surviving spouse – and only to her or else the marital deduction (i.e. what is put into the QTIP trust) would be disallowed. Use of the house would obviously be the surviving spouse’s right in this regard too.


Finally at the surviving spouse’s death, the assets in the trust (i.e. the house) are considered part of her estate for purposes of calculating any estate tax that may be due upon her death. Nevertheless, all QTIP trust assets are paid to his children. 


Because the QTIP trust assets are part of the surviving spouse’s estate, they get a step-up tax basis. This means their tax basis immediately jumps from what it was previously to their fair market value on the surviving spouse’s date of death. If the children decided to sell the house upon receipt of it, they’d have no capital gains tax on it because the tax basis would then be equal to it sales price.


Lastly, since the QTIP is a trust, it bypasses probate at the surviving spouse death.


Contact our office so we can help you with a QTIP trust.