QTIP Trusts And Controlling The Second Death

Estate planning for a second marriage has to satisfy two aims at once: provide for the surviving spouse, and ensure children from an earlier marriage eventually inherit.

The structure in outline

The trust pays all its income to the surviving spouse for life, and the spouse cannot be deprived of that entitlement or have it diverted elsewhere.

On the spouse's death, the remaining capital passes to beneficiaries named by the first spouse to die, typically their own children.

The survivor enjoys the benefit without controlling the destination, which is the entire point of the arrangement and what distinguishes it from an outright gift.

Why it qualifies for the marital deduction

A limited interest ordinarily fails to qualify, because the property is really passing to someone else after the spouse's death.

These trusts are an express exception. Where the requirements are met and an election is made on the estate tax return, the deduction is allowed despite the limitation.

The price of the election is that the trust assets are included in the surviving spouse's estate at their death, so tax is deferred rather than avoided.

The requirements that must be met

The spouse must be entitled to all income, payable at least annually, and no one may have power to appoint the property to anyone else during the spouse's life.

The election must be made affirmatively on a timely return, and partial elections are possible where only part of the trust is intended to qualify.

Failing any requirement loses the deduction entirely, which makes the drafting technical and unforgiving of improvised amendments.

Tensions built into the design

The spouse wants income, favouring investments that yield. The remainder beneficiaries want growth, favouring investments that appreciate instead.

A trustee is caught between them, and the conflict is structural rather than a failure of goodwill, which is why an independent trustee is usually preferred.

Unitrust conversions, where the spouse receives a percentage of the trust value rather than actual income, are used in some jurisdictions to align the two interests.

Where it fits and where it does not

The structure suits a first spouse who wants to provide genuinely for a survivor without risking that the survivor's later decisions redirect the capital.

It fits badly where the spouse needs access to capital rather than income, or where the remainder beneficiaries are of similar age to the survivor and will wait decades.

Qualification rules, election procedures and unitrust options vary by jurisdiction and change over time. This is general explanation, and any specific structure requires a qualified professional.