QTIP (qualified terminable interest property)

By Richard C. Wilson

A qualifying income interest for life gives the spouse all income from the property, payable at least annually, or a usufruct interest for life. No person may have a power to appoint any part of the property to anyone other than the spouse during the spouse's life. A power exercisable only at or after the spouse's death is allowed. IRC §2056(b)(7) sets out these requirements.

For the estate tax marital deduction, the property interest must pass from the decedent to the surviving spouse and is deductible only to the extent included in the decedent's gross estate. A surviving spouse who is not a U.S. citizen must satisfy the applicable qualified domestic trust exception or become a citizen before the estate tax return is filed while having been a U.S. resident continuously from the decedent's death until becoming a citizen. IRC §2056(a) and (d) provides these limits.

How it works

Estate elections and partial elections

An executor makes an estate QTIP election by listing qualifying property on Schedule M, line 4, inserting its value, and claiming the applicable deduction. All other marital deduction requirements must still be satisfied.

Listing qualifying property on Schedule M and entering all or part of its value as a deduction creates the election presumption unless the executor specifically identifies the property, or a fractional portion or percentage, to be excluded. If the deduction is less than the entire value included in the gross estate, the election covers only a fraction equal to the amount deducted divided by the property's total value.

A partial election must cover a defined fraction or percentage so that the elected share reflects its proportionate share of subsequent appreciation or depreciation. A formula may define that fraction or percentage.

The applicable estate tax return is the executor's last return filed on or before the due date, including extensions. If no timely return was filed, the applicable return is the executor's first return filed after the due date.

An estate QTIP election is irrevocable except that it may be revoked or modified on a subsequent return filed by the due date, including extensions actually granted.

If an executor appointed under local law elects for one or more properties on the applicable return, no subsequent election for other properties included in the gross estate may be made after that return is filed.

Lifetime QTIP elections

A lifetime transfer can qualify for the gift tax QTIP marital deduction when the donor spouse transfers the property, the donee spouse has a qualifying income interest for life, and a gift tax QTIP election applies. Rules similar to the estate QTIP income interest and property interest rules apply. The gift tax marital deduction is generally unavailable when the donee spouse is not a U.S. citizen.

A lifetime QTIP election is irrevocable and must be made by the gift tax return due date prescribed under §6075(b), determined without regard to §6019(2).

On Form 709, the donor lists the QTIP on Schedule A, deducts its value on Schedule A, Part 4, line 4, and checks column (l). Listing and deducting qualified property creates the election presumption. The election cannot be made on a Form 709 filed late.

Survivor annuities

Certain survivor annuities receive automatic estate QTIP election treatment when the annuity is included in the decedent's gross estate under §2039, or an annuity interest arising under state community property law is included under §2033, and only the surviving spouse may receive payments before that spouse's death.

For such an annuity, the spouse's interest is treated as a qualifying income interest for life and the executor is treated as making the QTIP election unless the executor elects out on the estate tax return. An election to opt out is irrevocable. Other marital deduction requirements still apply.

A joint and survivor annuity receives automatic lifetime QTIP election treatment when only the donor and donee spouses may receive payments before the last spouse dies. The donee spouse's interest is treated as a qualifying income interest for life.

For such an annuity, the donor is treated as electing QTIP unless the donor elects out by the gift tax return due date prescribed under §6075(b), determined without regard to §6019(2). An election to opt out is irrevocable.

For such an annuity, §2523(f)(5) and §2519 do not apply to the donor spouse's annuity interest. If the donee spouse dies before the donor spouse, no amount from the annuity is included in the donee spouse's gross estate under §2044.

Lifetime QTIP and the donor's estate

QTIP can consist of an interest in property rather than complete ownership of an asset. An asset category alone does not establish qualification. The property interest must satisfy the applicable QTIP requirements.

For property transferred by a donor spouse that qualifies as lifetime QTIP, with a qualifying income interest for life for the donee spouse and a valid gift tax QTIP election, §2523(f)(5) excludes the property from the donor spouse's gross estate and disregards the donor's subsequent transfers of an interest for gift tax purposes.

The exclusion and gift tax treatment end after the donee spouse is treated as transferring the property under §2519 or the property becomes includible in the donee spouse's gross estate under §2044. The special annuity rules described above apply separately. Read the marital deduction and QTIP guide.

Points that are easy to confuse

QTIP and reverse QTIP

An estate reverse QTIP election treats property for which a marital deduction was allowed under §2056(b)(7) as though the QTIP election had not been made for generation skipping transfer tax purposes. The first decedent is treated as the GST transferor of all property in the trust for which that deduction was allowed.

The executor makes the irrevocable reverse election by listing qualifying property on Schedule R, Part I, line 9, on the same return as the QTIP election. The reverse election must include all property in the trust to which the QTIP election applies. If the QTIP election is protective, the reverse election is effective only if a protective reverse QTIP election is also made.

With that reverse QTIP election, the executor may allocate part or all of the decedent's GST exemption to the property.

For a gift in trust listed on Schedule A for which QTIP treatment is elected, the donor may elect to treat the entire trust as non QTIP for GST purposes by checking Form 709 column (m) and identifying the specific gift's item number.

The lifetime reverse election must cover the entire trust containing that gift and must be made on the same return as the QTIP election. The election is irrevocable. If the QTIP election is protective, the reverse election is effective only if a protective reverse QTIP election is also made. Read the guide to marital deduction and reverse QTIP elections.

Connecticut only: Gift tax reporting

In Connecticut, the gift tax QTIP exception permits a deduction for a terminable interest when the spouse receives all income for life, paid at least yearly, no other person has a power to appoint the property except to the spouse, and a federal QTIP election is made and reflected by checking Schedule A, line 16.

For that exception, the spouse need not have the unlimited appointment power required for the separate power of appointment exception. Schedule A, line 16 may not be checked without the federal election.

Common questions