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Trust Law/Level III · Family trusts/3.3 Couples and blended families/Lesson 2

The QTIP trust

How a QTIP trust provides for a surviving spouse for life while the first spouse chooses who receives what remains.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Draft a ‘Clayton’ QTIP: the spouse’s income interest can be contingent on the executor’s election (Treas. Reg. §20.2056(b)-7(d)(3)), so the amount to qualify is chosen after death with current figures. Catch: once made on Form 706, the election is irrevocable.
  2. Elect QTIP for only a fraction or portion (IRC §2056(b)(7)) to use the first spouse’s exclusion and defer the rest tax-free. Catch: the elected property is taxed in the survivor’s estate under §2044, at its value then.
  3. Leave the survivor’s estate its statutory right to recover tax from the QTIP property (IRC §2207A), protecting the survivor’s own heirs at no cost. Catch: a will or revocable trust that specifically waives it forfeits that recovery.
  4. QTIP property is included at the survivor’s death and so gets a fresh basis then (IRC §1014), which can erase capital gains for the children. Catch: basis can step down, and the spouse must receive all income at least annually.

MaterialsThe federal basic exclusion amount for the current year ($15 million per person for 2026)the draft of your existing will or revocable living trusta list of all jointly owned assets and their approximate values

Wonder

  1. Why does the tax law insist that my spouse receive all the income?
  2. Can I use a QTIP trust to leave money to my children from a previous marriage without my current spouse losing income?
  3. If my spouse remarries, can they change who gets the leftover assets in a QTIP trust?

Explore

  1. Under US federal estate tax law, a gift to a spouse that ends at the spouse’s death, such as a life interest, is a ‘terminable interest’ and generally does not qualify for the marital deduction. The Economic Recovery Tax Act of 1981 added an exception in Internal Revenue Code §2056(b)(7) for ‘qualified terminable interest property’ (QTIP). If the executor elects, property in which the spouse has a qualifying income interest for life gets the marital deduction, so no estate tax is due on it at the first death; it is taxed instead in the survivor’s estate. It is often discussed for second marriages, where the first spouse wants to support the survivor but choose who receives the property later.
  2. The surviving spouse must be entitled to all the income from the property, paid at least once a year, for life. During the spouse’s life, no one may have a power to appoint any part of the property to anyone other than the spouse. So dividends, interest or rent the trust receives must go to the spouse, and none can be paid to children while the spouse lives. The trust may allow principal to be paid to the spouse, but not to anyone else, during the spouse’s lifetime. These conditions are in §2056(b)(7)(B)(ii).
  3. The first spouse’s trust document names the remainder beneficiaries, who receive what is left when the surviving spouse dies. The survivor cannot change them unless the document gives the survivor a power to appoint the property at death, which the law allows. The remainder is not guaranteed in amount: if the document lets the trustee pay principal to the spouse, less may be left. Within those terms, the arrangement can keep property for children of an earlier marriage.
  4. Under IRC §2044, property for which a QTIP election was made is included in the surviving spouse’s gross estate at its value when the survivor dies, so any growth is included too. Under IRC §2207A, unless the survivor’s will or revocable trust specifically waives it, the survivor’s estate can recover from the QTIP property the extra estate tax caused by including it. Whether any tax is due depends on the size of the survivor’s whole estate and the exclusion in that year. Because the property is included in the survivor’s estate, it generally takes a new tax basis at that death.
  5. The executor makes the QTIP election on the first spouse’s federal estate tax return, Form 706 (Schedule M). Under §2056(b)(7)(B)(v), the election is irrevocable once made. The executor may elect for all of the property or only a specific portion, and that choice affects how much tax is deferred and how much of the first spouse’s own exclusion is used. Because the election cannot be undone, executors usually make it with a tax adviser.
  6. A QTIP trust offers limited protection from the surviving spouse’s own risks. Income paid to the spouse belongs to the spouse and can be reached by the spouse’s creditors once paid; whether creditors can reach the income right or the principal before payment depends on state law and on whether the trust has a spendthrift clause. For means-tested benefits such as Medicaid, income the spouse receives usually counts; how the trust itself is treated varies by state and by how the trust was set up.

Key facts

  • The QTIP election was established in 1981 under IRC §2056(b)(7) from the Economic Recovery Tax Act.
  • The surviving spouse must receive all trust income at least annually for life; no other beneficiary can share this income during the spouse’s life.
  • The first spouse’s trust document names the remainder beneficiaries; the survivor cannot change them unless the document grants a power exercisable at the survivor’s death.
  • Property for which the QTIP election was made is included in the surviving spouse’s gross estate under IRC §2044.
  • The executor makes the QTIP election on the first spouse’s federal estate tax return (Form 706); once made, it is irrevocable.
  • Bypass trust assets are not included in the survivor’s estate; property covered by a QTIP election is.

Exercise nine, six, three, one

9CollectList up to 9 people and goals a plan for a surviving spouse might involve (most families have fewer), such as the spouse’s income needs, the family home, children from an earlier marriage, joint children, or a relative with a disability.
6ClusterSort them into 6 categories: the spouse’s income, the spouse’s housing, the spouse’s other needs, remainder beneficiaries, tax timing, and who manages the trust.
3DistillReduce the 6 categories to 3 groups: what a QTIP trust must give the spouse by law, what the first spouse can still decide, and what stays uncertain until the survivor dies.
1CrystallizeWrite 1 sentence that explains the trade-off between deferring taxes now and including assets in your spouse’s future estate.

Fact check

Dates, figures and claims checked against the published sources listed below.

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