QTIP &
the Marital Deduction
A QTIP trust lets the first spouse control where the property ultimately goes while deferring estate tax to the second death. With a $15 million exemption, the election is now as much about basis, portability, state tax, and GST exemption as about federal tax.
Last reviewed
The terminable interest problem
Transfers to a surviving spouse who is a U.S. citizen qualify for an unlimited marital deduction under IRC 2056, but a “terminable interest” generally does not: property left in trust, where the spouse’s interest ends at death and the remainder passes to others, fails the basic rule. Qualified terminable interest property (QTIP) under IRC 2056(b)(7) is the exception most estates rely on. It lets the first spouse control where the property ultimately goes while still deferring estate tax until the second death.
To qualify, the surviving spouse must be entitled to all of the income for life, payable at least annually, and no one may have a power to appoint any of the property to anyone other than the spouse during the spouse’s life. The spouse must also be able to require the trustee to make unproductive property productive. The executor then makes the election on Schedule M of Form 706, identifying the property, and a partial election can be made by fraction or percentage.
Four ways to structure the first death
| Approach | Marital deduction | In the survivor’s estate | Basis step-up at second death | Who picks the final heirs |
|---|---|---|---|---|
| Outright to the spouse | Yes | Yes | Yes | Surviving spouse |
| QTIP trust (election made) | Yes | Yes (IRC 2044) | Yes | First spouse, through the trust |
| General power of appointment trust | Yes | Yes (IRC 2041) | Yes | Surviving spouse, through the power |
| Credit shelter (bypass) trust | No; uses the first spouse’s exemption | No | No | First spouse, through the trust |
Why the election still matters with a $15 million exemption
With the federal exclusion at $15,000,000 for 2026, most estates do not need a marital deduction to avoid federal tax. The election is often still valuable:
- Basis at the second death: QTIP property is included in the surviving spouse’s estate under IRC 2044 and receives a new basis at the second death, which credit shelter trust assets do not.
- Portability: property that qualifies for the marital deduction leaves the first spouse’s exclusion unused and available as DSUE. Rev. Proc. 2016-49 confirms the IRS will not disregard a QTIP election on a return filed to elect portability.
- State estate tax: most states do not allow portability, and many permit a separate state-only QTIP election that defers state tax to the second death. Massachusetts adds that property back at the survivor’s death for deaths on or after August 1, 2025.
- Reverse QTIP for GST: the GST exemption is not portable. A reverse QTIP election under IRC 2652(a)(3) keeps the first spouse as the transferor for GST purposes, so the first spouse’s GST exemption can be allocated to the trust.
Clayton QTIPs and partial elections
A trust can provide that property for which no QTIP election is made passes to a different trust, such as a credit shelter trust, and the regulations respect that structure. Combined with a partial election, this lets the executor decide after death, with the full picture, how much to defer to the second estate and how much to shelter with the first spouse’s exemption.
Making, and unmaking, the election
The election is made on the last Form 706 filed on or before the due date, including extensions, or, if no timely return is filed, on the first return filed after the due date. Once made, it is irrevocable. Where an election was unnecessary to reduce estate tax and portability was not elected, Rev. Proc. 2016-49 provides a procedure to have it treated as void.
At the second death, and before it
- Inclusion and recovery: the QTIP property is included in the surviving spouse’s estate, and under IRC 2207A the survivor’s estate can recover the resulting estate tax from the trust unless the survivor’s will waives the right.
- Lifetime disposition trap: if the surviving spouse gives away or sells any part of the income interest, IRC 2519 treats the spouse as making a gift of the entire remainder.
- Income tax: a QTIP trust is a non-grantor trust that must distribute its income to the spouse, who reports it through DNI. Capital gains allocated to principal are usually taxed to the trust, at 37% above $16,000 of income in 2026.
- Non-citizen spouse: the marital deduction generally requires a qualified domestic trust (QDOT), with its own trustee and distribution rules, under IRC 2056(d) and 2056A.
What we handle
- Modeling QTIP, credit shelter, and partial election outcomes at the first death
- Schedule M marital deduction elections, including Clayton and partial elections
- Reverse QTIP elections and GST exemption allocation
- State-only QTIP elections and state estate tax coordination
- QTIP trust income tax returns and income distributions to the spouse
- Second-death inclusion, IRC 2207A recovery, and basis documentation