A qualified terminable interest property (QTIP) trust is an estate planning tool that allows the person making the trust (the grantor or settlor) to leave assets for their surviving spouse and direct how the assets remaining in the trust will be distributed to named beneficiaries at the death of the surviving spouse. QTIP trusts are irrevocable (cannot be revoked). At least one trustee (person or entity) must be appointed by the trust to manage the assets of the trust.

A QTIP trust will usually provide regular payments to the surviving spouse—often from the income generated by the assets in the trust. QTIP trusts are often used when the grantor remarries and has children from a previous marriage. If the grantor dies before the grantor’s subsequent spouse dies, the QTIP trust will make income payments to the subsequent spouse and hold the principal assets that were placed in the trust until the surviving spouse dies—at which point the assets will be distributed to the trust beneficiaries.

At the death of the grantor, the executor of the grantor’s estate will file the estate’s tax return and make an election (the QTIP election) of which assets will be placed in the QTIP trust by listing them on a schedule to the estate’s tax return. The assets in a QTIP trust are not subject to estate tax at the grantor’s death but are subject to estate tax at the death of the grantor’s surviving spouse.

In Illinois, a Qualified Terminable Interest Property (QTIP) trust is a type of trust that allows a grantor to provide for a surviving spouse while maintaining control over the distribution of the trust assets after the surviving spouse's death. This is particularly useful in situations such as second marriages, where the grantor wishes to ensure that children from a previous marriage will eventually inherit the assets. The QTIP trust is irrevocable, meaning it cannot be altered or revoked once it is established. The trust provides income to the surviving spouse and defers the principal to be passed on to the named beneficiaries after the surviving spouse's death. For tax purposes, the assets in the QTIP trust are excluded from the grantor's estate tax at the time of their death. Instead, they are included in the surviving spouse's estate for estate tax purposes upon their death. The executor of the grantor's estate must make a QTIP election on the estate tax return to specify which assets are to be placed in the QTIP trust. It's important to note that while the QTIP trust is recognized at the federal level, state laws may have specific provisions regarding trusts and estate taxes, so it's advisable to consult with an attorney familiar with Illinois estate planning laws to ensure compliance and to optimize the estate planning strategy.