In which way are the QTIP trust and the AB trust similar?
Both use the marital deduction in much the same way. The primary difference is that the QTIP trust does not grant the surviving spouse a general power of appointment over the A trust. The B trust remains the same. Recall that if a married couple has an AB Trust estate plan when the first spouse dies, an amount equal to the federal estate tax exemption will be funded or moved into the B (marital) Trust, and anything over this amount will remain as the A (family) Trust. See: What is an AB-Trust.
What does terminable interest in “qualified terminable interest property” mean?
Life estates, terms for years, annuities, patents, and copyrights are terminable interests. More broadly and in legalese, a “terminable interest” in property is an interest which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of some contingency.
Why does it matter that the property interests are terminable?
In the past an AB-trust would qualify for the marital deduction only if the surviving spouse was given a general power of appointment. If not, the trust was considered a terminable interest, for which no marital deduction was allowed. A 1982 amendment to the estate tax law, however, permits the marital deduction for most terminable interests. To create a QTIP trust, the executor must make a “QTIP election” on the estate tax return that’s filed for the estate of the first spouse to die.
When is a QTIP trust particularly important?
Spouses who each have children from an earlier marriage may worry that the surviving spouse uses their powers of appointment to change the distribution of the trust assets in favor of the surviving spouses’s children. Also, a remarrying surviving spouse could use the powers to transfer the A trust to the new spouse. A QTIP trust does not include powers of appointment. Therefore, the settlor can be assured that the originally planned distribution remains intact and cannot be modified later date by the surviving spouses.
