Planning Point: If a substantial age disparity exists between the spouses, a QTIP trust may not be an attractive option, as it requires that the decedent’s children and other heirs wait until the death of a much younger spouse before receiving property that may form the bulk of their inheritance.
A QTIP trust is a trust that contains qualified terminable interest property. “Qualified terminable interest property” means property (1) which passes from the decedent, (2) in which the surviving spouse has a “qualifying income interest for life,” and (3) as to which the executor makes an irrevocable election on the federal estate tax return to have the marital deduction apply.
The surviving spouse has a “qualifying income interest for life” if (1) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, and (2) no person has a power to appoint any part of the property to any person other than the surviving spouse unless the power is exercisable only at or after the death of the surviving spouse.1 The last requirement may be violated even if it is the surviving spouse who is given the lifetime power to appoint to someone other than the surviving spouse.2 A QTIP allows a decedent to provide for a surviving spouse, receive the marital deduction, and pass the remainder to beneficiaries the decedent selects in his or her will.
Planning Point: A QTIP election is irrevocable, so that the property transferred to the QTIP trust will be included in the surviving spouse’s gross estate.
An executor can elect under IRC Section 2056(b)(7) to treat an individual retirement account and a trust as QTIP if the trustee is the named beneficiary of decedent’s IRA and the surviving spouse can compel the trustee to withdraw from the IRA an amount equal to all the income earned on the IRA assets at least annually and to distribute that amount to the spouse. No person can have a power to appoint any part of the trust property to any person other than the spouse.3
Certain “terminable interests” in property do not qualify for the marital deduction. The purpose of this rule is to ensure inclusion in the surviving spouse’s estate of any property remaining in the estate at his or her death which escaped the initial tax in the predeceased spouse’s estate.