Both QTIP trusts and IRC § 2056(b)(5) power of appointment trusts require all trust income to be payable to the surviving spouse at least annually for life. When the trust holds assets producing little or no current income, this creates tension: the trust must generate income, but the assets may not cooperate.
Unproductive property provisions address this tension by giving the surviving spouse (or the trustee) a mechanism to ensure adequate income when some trust assets produce no income. Without these provisions, holding unproductive property in a marital trust can jeopardize the marital deduction.
Why Unproductive Property Is a Problem
The “all income annually” requirement means the surviving spouse must receive a reasonable return on trust assets. If the trust holds undeveloped land, a closely held business that reinvests all earnings, an art collection, or growth stock paying no dividends, the surviving spouse receives no income from those assets. If non-income-producing assets make up a substantial portion of the trust, the surviving spouse’s income interest may be effectively illusory.
Regulations address this concern by requiring the surviving spouse have “substantially that degree of beneficial enjoyment of the trust property during life which the principles of the law of trusts accord to a person who is unqualifiedly designated as the life beneficiary of a trust.” Treas. Reg. § 20.2056(b)-5(f)(1). A trust holding exclusively or predominantly non-income-producing assets without any mechanism for the surviving spouse to compel productivity may fail this standard.
One exception exists: personal use property. A personal residence and property used personally by the surviving spouse may be held in the marital trust even though it produces no income, because personal enjoyment is treated as equivalent to receiving income. Treas. Reg. §§ 20.2056(b)-5(f)(4); 20.2056(b)-7(h) Example 1.
The Four Approaches
Estate planners use four alternative provisions to address unproductive property. Any one satisfies the regulatory requirement, but each works differently.
- Right to compel productivity. The surviving spouse may require the trustee, by written notice, to convert unproductive property to productive property or make it productive within a reasonable time. This is the most popular approach because it gives the surviving spouse control without requiring preemptive trustee action.
- Consent requirement. The trustee may hold unproductive property only with the surviving spouse’s written consent. If the surviving spouse withholds consent, the trustee must convert the property. This approach ensures the surviving spouse is aware of and agrees to retaining non-income-producing assets.
- Compensating distribution from corpus. The trustee must distribute corpus to the surviving spouse in an amount equal to the difference between actual trust earnings and a reasonable return on the trust assets. This preserves non-income-producing assets (they are not converted) but ensures the surviving spouse receives an equivalent economic benefit.
- Compensating distribution from other assets. The surviving spouse may require the trustee to make payments from other trust assets to compensate for lost income from unproductive property. This resembles Option 3 but gives the surviving spouse the initiative rather than imposing an automatic trustee obligation.
The choice among these approaches depends on the trust’s asset composition and the surviving spouse’s need for current income.
Which Option to Choose
Option 1 (right to compel productivity) is most commonly used because it balances the surviving spouse’s income needs with trustee investment flexibility. The trustee can hold non-income-producing assets unless the surviving spouse objects. If the surviving spouse needs income, notice to the trustee triggers a conversion or productivity requirement.
Option 3 (compensating corpus distribution) works when the family wants to retain specific non-income-producing assets (a family farm, closely held business, vacation property) without converting them to income-producing investments. The surviving spouse receives the economic equivalent of income without disturbing the underlying assets.
Options 2 and 4 are less common but may be appropriate when additional spousal control or initiative is needed.
When No Provision Is Needed: The Estate Trust
The estate trust does not require annual income distributions and therefore needs no unproductive property provision. If the marital share includes significant non-income-producing assets and the surviving spouse does not need current income, the estate trust avoids the unproductive property issue entirely. For a discussion of when the estate trust’s freedom from the income requirement justifies its trade-offs, read our guide to estate trusts and when they make sense.
Drafting Best Practices
Every QTIP trust and IRC § 2056(b)(5) trust should include an unproductive property provision, even if the trust currently holds only income-producing assets. Trust investments change over time. The trustee may receive non-income-producing assets through estate administration, or investment decisions may shift the portfolio toward growth assets. Including the provision at drafting is insurance against future changes in the trust’s composition.
The provision should work with the trust’s investment powers. If the trust grants the trustee broad investment discretion (including the power to hold non-income-producing assets), the unproductive property provision ensures the surviving spouse can override that discretion when needed.