How the marital deduction and QTIP elections work

Keep three questions separate when reviewing the documents: whether the property qualifies, which election was made, and whose generation skipping transfer tax exemption is allocated.

What the spouse must receive

For estate QTIP treatment, the property must pass from the decedent to the surviving spouse, be included in the decedent's gross estate, and meet the qualifying income interest and election requirements.

The spouse must receive all income for life, payable at least annually. Lifetime QTIP also requires an immediate right to income.

An income interest lasting only a term of years does not qualify. Neither does a life interest that ends on a specified event, such as remarriage for estate QTIP or divorce for lifetime QTIP.

The appointment restriction also matters. The first question below explains when an appointment power can be permitted.

Citizenship changes the deduction rules

The estate tax marital deduction generally requires a surviving spouse who is a U.S. citizen. A noncitizen spouse requires a qualifying exception.

One exception covers property passing in a qualified domestic trust. Property also counts if transferred to, or irrevocably assigned to, that trust before the estate tax return is filed, subject to the trust's qualification requirements.

Another exception applies when the spouse becomes a citizen before the estate tax return is filed and was continuously a U.S. resident from the decedent's death until becoming a citizen.

Lifetime gifts to a noncitizen spouse do not receive the marital deduction. A separate annual exclusion applies only to present interests that would otherwise qualify for that deduction if the spouse were a citizen.

Income rights and unproductive assets

Retaining unproductive property can satisfy estate QTIP income requirements if administration rules require, or let the spouse require, that the trustee make it productive or convert it within a reasonable time.

Retention can also qualify when administration rules require the trustee to exercise the judgment and care a prudent owner would use with the assets.

A trust fails the income requirement if its primary purpose is safeguarding property without giving the spouse the required beneficial enjoyment.

Making the estate QTIP election

The executor makes the estate QTIP election on the estate tax return. Listing qualifying property and its value on Schedule M presumptively makes the election, but all other marital deduction requirements must still be satisfied.

The entire interest is elected unless an excluded fractional portion is specifically identified.

A partial election must cover a fractional or percentage share of qualifying property. That share must participate proportionately in increases and decreases in value for later QTIP estate inclusion and income interest disposition treatment.

The fraction or percentage may be defined by formula.

The controlling return is the last estate return filed by the due date, including extensions, or the first late return if no timely return was filed.

The election becomes irrevocable, although a subsequent return filed by the due date, including extensions actually granted, may revoke or modify it.

Making a lifetime QTIP election

An ordinary lifetime QTIP election must be made on a timely gift tax return for the transfer year, including authorized extensions. The election is irrevocable.

If that return covers the donor's death year, it must also be filed no later than the estate return deadline, including extensions.

Listing and deducting qualified property on Schedule A presumptively makes the election. An ordinary late Form 709 cannot make it.

A qualifying joint and survivor annuity has a separate deemed election rule. It applies when only the donor and donee spouses may receive payments before the last spouse's death.

The donor may elect out by the applicable gift return deadline. That election out is irrevocable.

What the reverse election changes

Reverse QTIP treatment applies only when a lifetime or estate QTIP election applies. For GST purposes, it treats the property as though that QTIP election had not been made.

Without a reverse election, the surviving spouse becomes the GST transferor when the QTIP property is included in that spouse's estate.

The reverse election must be made on the return making the QTIP election. It is irrevocable and must cover all property in the relevant trust to which the QTIP election applies.

A protective QTIP election also requires a protective reverse election for reverse treatment to be effective. Property qualifying under the separate marital deduction rule for a life estate with a general appointment power is ineligible.

A reverse QTIP election does not itself establish GST exemption. Each individual has a separate GST exemption that the individual or executor may allocate to property for which that individual is the transferor.

Allocations are irrevocable. GST exemption is not portable between spouses, and a deceased spouse's unused estate tax exclusion does not increase it.

Later estate inclusion and income interest transfers

QTIP property is included in the spouse's gross estate when that spouse held a qualifying income interest for life and a marital deduction was previously allowed under the estate or lifetime QTIP rules.

That QTIP inclusion rule does not apply if the income interest disposition rule already applied to the spouse's disposition of all or part of the income interest.

When a QTIP marital deduction was previously allowed, disposing of all or part of the qualifying income interest is treated as transferring all other interests in that property. The income interest transfer is considered separately.

Common questions

Can someone have a power to appoint QTIP property to another person?

Only if the power is exercisable solely at or after the spouse's death. During the spouse's life, no person may have a power to appoint any part of the QTIP property to anyone other than that spouse.

Can a trustee distribute principal to the spouse?

Yes. A trustee's power to distribute principal to or for the spouse does not itself defeat QTIP qualification, provided the other qualifying income interest requirements are met.

Estate QTIP fails the appointment restriction if the spouse is legally bound to transfer distributed property onward without full and adequate consideration. For lifetime QTIP, the corresponding restriction addresses a governing instrument requiring that onward transfer.

Can a later supplemental estate return add an omitted QTIP election?

Only if the supplemental return is filed by the original estate return's due date, including extensions actually granted. A supplemental return filed after that deadline cannot ordinarily add an election omitted from an earlier return.