QTIP
QTIP (Qualified Terminable Interest Property) is a trust structure under §2056(b)(7) where the surviving spouse receives all income from the trust for life, with the principal passing to other beneficiaries (typically children or trusts for children) at the surviving spouse's death. QTIP trusts qualify for the unlimited marital deduction at the first spouse's death even though the spouse doesn't receive the principal — solving the blended-family inheritance problem.
QTIP exists to handle the structural conflict in second marriages: the first-to-die spouse wants to provide for the surviving spouse but ultimately wants assets to go to children from a prior marriage. Without QTIP, the choice is binary — either leave assets to the spouse (which qualifies for the marital deduction but means the spouse can redirect them to her own beneficiaries) or to the children (which doesn't qualify for the marital deduction and incurs estate tax at the first death).
The QTIP solution: assets pass into a QTIP trust at the first death. The surviving spouse must receive all income annually for life and must have the right to compel the trustee to make the property income-producing. The principal stays in the trust; at the surviving spouse's death, it passes to the named remainder beneficiaries (usually the deceased's children from the prior marriage). The trust qualifies for the marital deduction at first death (§2056(b)(7) election on Form 706), but the trust assets are included in the surviving spouse's estate at second death.
The QTIP election is irrevocable. Once made on Form 706, the deceased's executor cannot reclaim the assets — the surviving spouse's income right is constitutionally protected. Trustees of QTIP trusts walk a tightrope: they must serve the income beneficiary's interests (the surviving spouse, who wants maximum income) and the remainder beneficiaries' interests (the prior-marriage children, who want capital preservation and growth). State law on trustee neutrality and Uniform Principal and Income Act allocations governs the actual investment management.
- First deathHusband dies; assets pass to QTIP trustForm 706 filed with §2056(b)(7) QTIP election. Marital deduction applies; no estate tax at first death.
- Years 1–NWife receives all trust income for lifeTrustee invests for income production (wife's right) while preserving principal (children's eventual interest).
- Second deathWife dies; QTIP assets included in her estateQTIP trust assets valued at second death. Wife's own exemption (and any DSUE from Husband) applied. Estate tax owed by Wife's estate (not the trust).
- Post-second-deathQTIP principal passes to Husband's childrenTrust terminates per its document; remainder passes to the named beneficiaries (typically Husband's prior-marriage children).
Synthetic blended-family households should include QTIP trust scenarios where one or both spouses have children from a prior marriage. The trust should track the income distribution to the surviving spouse and the remainder beneficiary tree. Estate-tax projections at the surviving spouse's death must include the QTIP trust assets, even though the survivor never owned the principal directly.
Common pitfalls
- Failing to make the §2056(b)(7) QTIP election on Form 706 — without the election, the assets don't qualify for the marital deduction.
- Treating the QTIP assets as out of the surviving spouse's estate — they're explicitly included at the second death.
- Failing to give the surviving spouse the right to compel income production — the trust must allow the spouse to require income-generating investments.
- Confusing QTIP with credit-shelter trust — a credit-shelter trust uses the deceased's exemption and stays out of the survivor's estate; QTIP uses the marital deduction and is back in the survivor's estate.
Examples
Husband (second marriage) dies with $8M estate. Wife is current spouse; Husband has three children from a prior marriage. Husband's will: $4M to QTIP trust (income to wife for life, remainder to Husband's children); $4M to credit-shelter trust (using Husband's exemption, remainder to children). Wife receives QTIP income for life. At Wife's death: QTIP $4M is in her estate (likely covered by her own exemption); QTIP principal passes to Husband's children per the trust terms. Wife cannot redirect to her own children.