A qualified terminable interest property (QTIP) trust under IRC § 2056(b)(7) is the most widely used marital trust in modern estate planning. The QTIP trust gives the surviving spouse all trust income at least annually for life, while the first spouse (through the trust terms) controls who receives the trust property after the surviving spouse’s death.
The QTIP trust’s combination of spousal protection and remainder control makes it the default choice for most estate planners. The QTIP becomes especially valuable for families with children from prior marriages, where the first spouse wants to provide for the surviving spouse without diverting assets from intended beneficiaries.
QTIP Trusts: Two Substantive Requirements
A QTIP trust qualifies for the marital deduction only if it satisfies two substantive requirements:
- All income must be payable to the surviving spouse at least annually for life. The surviving spouse must be entitled to all of the trust’s income, distributed no less frequently than once per year, for the surviving spouse’s entire life. This requirement is identical to the income requirement for an IRC § 2056(b)(5) power of appointment trust. The trustee cannot accumulate income, divert it to other beneficiaries, or condition its payment on any event (including the surviving spouse’s remarriage or incapacity). “All income” means the trust must be invested to produce a reasonable return. If the trust holds unproductive property (non-income-producing assets), the trust document should include a provision allowing the surviving spouse to compel the trustee to make the property productive or convert it.
- No person may have a power to appoint trust property to anyone other than the surviving spouse during the surviving spouse’s lifetime. This restriction ensures that the surviving spouse is the sole beneficiary during life. No trustee, beneficiary, or third party can direct trust property away from the surviving spouse before the surviving spouse dies. This restriction applies only during the surviving spouse’s “overlife,” meaning while the surviving spouse is alive. After the surviving spouse’s death, the trust property can pass to anyone the first spouse designates in the trust terms. The surviving spouse can also be given a limited (nongeneral) testamentary power of appointment to redirect the remainder among a class of permissible beneficiaries at death.
Both requirements must be satisfied for the QTIP election to be available. The personal representative then decides whether to make the election on the estate tax return.
QTIP Election: Postmortem Flexibility
The third requirement is procedural rather than substantive: the decedent’s personal representative must elect on the estate tax return (Form 706) to treat the trust as QTIP. Without this election, the trust does not qualify for the marital deduction.
The election requirement is the QTIP trust’s most powerful feature. Unlike an IRC § 2056(b)(5) trust (which qualifies automatically if the requirements are met), the QTIP trust qualifies only when the personal representative elects QTIP status. This creates postmortem planning flexibility that no other marital trust form provides.
Partial Elections
The personal representative can elect QTIP status for only a portion of the trust, treating part of it as qualified terminable interest property. The elected portion qualifies for the marital deduction; the nonelected portion does not qualify and is taxed in the decedent’s estate (sheltered by the unified credit if available). At the surviving spouse’s death, only the elected portion is included in the surviving spouse’s estate under IRC § 2044. The nonelected portion passes free of further estate tax.
Partial elections allow the personal representative to fine-tune the estate tax result after death, when all relevant facts are known. The personal representative can calibrate the election to optimize the marital deduction, the IRC § 642(g) swing item election, the IRC § 2013 previously taxed property credit (if the surviving spouse dies soon after), and the GST exemption allocation. No other trust form offers this degree of postmortem control.
QTIP Trusts: Additional Spousal Benefits Beyond Income
Although no general power of appointment is required, the QTIP trust can grant the surviving spouse additional benefits beyond the mandatory income interest:
- Testamentary power of appointment. The surviving spouse can be given a nongeneral testamentary power to appoint the trust remainder at death among a defined class (typically the couple’s descendants). This provides flexibility to adapt the distribution plan to circumstances that cannot be predicted. The power must be nongeneral; a general power would cause the trust to qualify automatically under IRC § 2056(b)(5), eliminating the QTIP election’s postmortem flexibility.
- Withdrawal power over corpus. The surviving spouse can be given a limited power to withdraw trust principal during life, provided the power is restricted to an ascertainable standard (health, education, maintenance, and support) or limited to the greater of $5,000 or 5% of trust corpus annually under IRC § 2041(b)(2). An unrestricted withdrawal power would constitute a general power of appointment, which would undermine the QTIP structure.
- Invasion by the trustee. The trustee can be authorized to distribute trust principal to the surviving spouse for health, education, maintenance, and support (or under a broader standard if an independent trustee holds the power). Principal invasions for the surviving spouse’s benefit do not violate the QTIP requirements as long as no one can appoint the property to a third party during the surviving spouse’s lifetime.
These additional powers are optional and should be tailored to the family’s circumstances. The estate planner must ensure that no power rises to the level of a general power of appointment, which would disqualify the trust from QTIP treatment.
The Reverse QTIP Election for GST Planning
IRC § 2652(a)(3) allows the personal representative to make a “reverse QTIP election” that treats the first spouse (rather than the surviving spouse) as the transferor of the QTIP trust for generation-skipping transfer (GST) tax purposes. This allows the first spouse’s GST exemption to be allocated to the QTIP trust, sheltering it from GST tax when distributions are made to grandchildren or more remote descendants.
Without a reverse QTIP election, the QTIP trust is treated as belonging to the surviving spouse for GST tax purposes. This happens because the QTIP election causes the trust to be included in the surviving spouse’s gross estate under IRC § 2044, which makes the surviving spouse the “transferor” for GST purposes. The first spouse’s GST exemption cannot be allocated to the trust at all. Instead, the surviving spouse’s GST exemption must cover both the QTIP trust and the surviving spouse’s own assets. If the combined total exceeds the surviving spouse’s available exemption, any distributions or remainder passing to grandchildren or more remote descendants will be subject to the generation-skipping transfer tax at a flat 40% rate.
The reverse QTIP election requires a separate QTIP trust. It cannot be made for a portion of a single trust. This means the estate plan must create at least two marital trusts if the reverse QTIP election is part of the strategy: one QTIP trust for the reverse QTIP election (to which GST exemption is allocated) and one for the remaining marital share.
QTIP Trust Tax Consequences at the Surviving Spouse’s Death
The elected QTIP trust property is included in the surviving spouse’s gross estate under IRC § 2044, regardless of who actually receives the property at the surviving spouse’s death. The surviving spouse’s estate may recover the estate tax attributable to the QTIP inclusion from the trust beneficiaries under IRC § 2207A, unless the surviving spouse’s will waives this right.
The QTIP trust property receives a new stepped-up basis under IRC § 1014 at the surviving spouse’s death. This second basis step-up is one of the advantages of the marital trust over the credit shelter trust, which receives a basis step-up only at the first death.
Stub Income at the Surviving Spouse’s Death
Income that accrues between the last distribution date and the surviving spouse’s death is called “stub income.” The QTIP regulations provide that stub income need not be paid to the surviving spouse’s estate or subject to a power of appointment. It is included in the surviving spouse’s gross estate along with the rest of the QTIP property, and the trust document can direct how it is distributed (typically to the remainder beneficiaries). The trust document should specifically address stub income to avoid disputes.
QTIP Trusts: Why They Dominate Modern Practice
Most estate planners choose the QTIP trust as their default because it combines three features that no single alternative provides: control over the remainder (the first spouse decides who gets the property after the surviving spouse dies), postmortem flexibility (the personal representative can fine-tune the tax result through partial elections), and creditor protection (the surviving spouse does not hold a general power of appointment that creditors could reach).
For families where the surviving spouse needs maximum control rather than protection, the power of appointment trust may be more appropriate.
Deciding which marital trust type fits your family’s situation requires comparing the tradeoffs across remainder control, postmortem flexibility, and spousal autonomy — our guide to comparing QTIP trusts, power of appointment trusts, and estate trusts walks through each option’s advantages and limitations.