A Trustee's Responsibilities for a QTIP Trust

by John Cromwell

A Qualified Terminable Interest Property Trust (QTIP) is a legal device used to minimize gift and estate taxes. A QTIP is also used to ensure the surviving spouse is cared for but the decedent's property does not go to the spouse's children from a prior marriage. The trust grants the surviving spouse use of a decedent’s property for the rest of her life. After the surviving spouse dies, the trust property goes to the beneficiaries as chosen by the first decedent. The beneficiaries generally are the first decedent's children. A trustee of a QTIP has the same general responsibilities as the trustee of a normal trust, with a few exceptions.

Following Terms of Trust

A trustee’s first responsibility is to comply with the terms stated in the declaration of trust. The declaration creates the trust and establishes how the property is to be distributed, who gets the property and when they get the property. The key terms to check for in a QTIP is who gets the property after the surviving spouse dies and the spouse’s rights to the trust property while she is alive.

Fiduciary Duty

The trustee is required to treat all beneficiaries impartially. In terms of a QTIP, that means the trustee must ensure the surviving spouse enjoys the trust property while maximizing the value of the trust for the people who will receive the assets after the surviving spouse dies. The trustee is also prohibited from using his position to unfairly benefit himself. An example of a way that a trustee could unfairly use his position is to sell a product or service to the trust at a higher than normal price for his own profit.

Trust Property Distributions

How the trust property is distributed is especially important, as one of the key purposes of a QTIP is to ensure that some of the property goes to the original decedent’s chosen beneficiaries. To qualify as a QTIP, all income generated by the trust’s investments must be transferred to the surviving spouse. For as long as the spouse lives, none of the trust’s principal can be distributed to anyone other than the spouse. Depending on the terms, the surviving spouse may be able to withdraw the greater of $5,000 or five percent of the trust annually. The trustee also may be allowed to use the trust’s principal to maintain the surviving spouse’s standard of living.

Prudent Investing

A trustee is required to invest prudently and to avoid unduly risky options. This requires the trustee to consider the future needs of the beneficiaries and how much money they will need to accomplish their goals. The trustee is required to base their strategy on those needs. In a QTIP, the spouse can order the trustee to sell certain investments and reinvest the sale proceeds in other securities to secure a higher return.