F—QTIP Trust
With large estates the QTIP trust provides a way to defer estate taxes by taking advantage of
the marital deduction, yet "control from the grave" by directing who will eventually receive the
property upon the death of the surviving spouse.
Under such a trust all income must be paid at least annually to the surviving spouse. The
trust can be invaded only for the benefit of the surviving spouse, and no conditions can be placed
upon the surviving spouse's right to the income (e.g., it is not permitted to terminate payments
of income should the spouse remarry). However, in order to qualify the executor must make an
irrevocable election to have the marital deduction apply to property placed in the trust. This
requirement not only gives the executor the power to determine how much, if any, of the estate
will be taxed at the first death, it also provides great flexibility for post-death planning based upon changing circumstances.
Our example assumes that in 2026 we have an estate of $32,000,000.
UPON THE FIRST DEATH, the estate is divided into two parts, with one part equal to $15,000,000 placed in a family or nonmarital trust ("B" trust in the chart). No taxes are paid on this amount since the trust takes full advantage of the $5,945,800 unified credit (i.e., the amount of credit in 2026 that allows each individual to pass $15,000,000 tax-free to the next generation). The remaining $17,000,000 is placed in the QTIP trust.
The executor may elect to have all, some, or none of this property treated as marital deduction property. Assume that in order to avoid appreciation of assets in the surviving spouse's estate and
obtain a stepped-up basis for additional assets taxed upon the first death, the executor decides to
make a partial election of $15,000,000 (i.e., of the $17,000,000 placed in the QTIP trust only
$15,000,000 will be sheltered from estate taxes at the first death). This means that $2,000,000,
the "nonelected" property, will be taxed at the first death. Although $800,000 of estate taxes must
be paid, the remaining $1,200,000 will now be excluded from the taxable estate of the surviving
spouse (any appreciation of this property after the first death will also be excluded). If authorized
under the trust document or by state law, the executor can sever the QTIP trust into separate
trusts.
UPON THE SECOND DEATH, the estate subject to taxation is limited to the $15,000,000 (the amount remaining in the trust for which estate taxes were deferred). This amount incurs taxes of $800,000 after the 2026 unified credit. Thus the entire $15,000,000, together with the $15,000,000 from the "B" trust, are passed to the beneficiaries under the terms previously established in these trusts.
