Gifts to Spouse utilizing Qualified Terminal Interest Property (QTIP)

What is a QTIP?

We’re not talking about that little stick with the cotton on both ends. QTIP stands for qualified terminal interest property. Qualified means it’s property that is qualified for the marital deduction. Terminal means the surviving spouse gets the income interest during his/her lifetime but that interest terminates at his/her death.

The IRC specifies types of property which qualify for the marital deduction. Basically, the IRS wants the property taxed in the surviving spouses estate if it is taken as a marital deduction in the decedent’s estate. This raises a problem in certain situations such as a husband with a second or successive spouse and children from former marriages. How could he leave money for the care of his current wife and still have his children ultimately inherit? Another situation may be the couple needs to equalize their estates to take advantage of the full unified credit for each. How can husband hand over assets to current wife and ensure they will go to his children? The answer lies in the use of a QTIP Trust.

How it works

During the husband’s lifetime, he can make unlimited marital gifts to his wife. If he makes them into a QTIP Trust, the assets are qualified for the marital deduction for gift and estate tax purposes. Wife is provided for from the income from the Trust and the Trust can distribute principal by an ascertainable standard in Trustee’s discretion. The grantor may either specially name his children as remaindermen or give his spouse a limited power to allocate the remainder among a class of beneficiaries consisting of his children.

At husband’s death: His estate takes a marital deduction for the QTIP Trust.

At wife’s death: The QTIP Trust is included in her estate. Her estate has the right to recover estate taxes due to the inclusion of the Trust from the QTIP Trust. The assets pass in accordance with husband’s instructions.

The essential elements of a QTIP...

1. The grantor must “pass” the property to the spouse. (i.e. An income interest in any old Trust won’t do.)

2. The surviving spouse must be entitled to all the income (no other beneficiary may receive any income during his/her lifetime) and the income must be paid at least once a year. The surviving spouse must have the right to demand non-income producing property be made productive.

3. No one can hold a power to appoint the Trust property to anyone other than the surviving spouse during his/her lifetime.

Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return automatically designates gifts meeting the requirements under IRC Section 2523(f) and meeting the other specifications on the return as QTIP property.
 
 

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