QTIP Trusts : The Lawyers' Corner

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QTIP Trusts

by Frank Heinisch, Christin Lovegrove on 10/03/16

A QTIP, qualified terminal interest property trust grants the surviving spouse an income interest in the trust.  The surviving spouse interest (life estate) is not subject to inheritance tax because of the spousal inheritance tax exemption, §77 2004. The remainder share is subject to inheritance tax.  Basis is stepped up upon the QTIP trust grantor’s death. 

 

The estate of the surviving spouse with QTIP trust with a testamentary power of appointment is fully exempt from inheritance tax §77 2004 and if she exercises or fails to exercise the power of appointment it is not an event subject to inheritance tax. See In re Estate of Nelson, 253 Neb. 414, 571 N.W.2d 269 (1997).  “Section 77-2008.04 specifically states that the exercise or nonexercise of the power of appointment by the donee is not a transfer subject to the taxation provisions of Neb.Rev.Stat. §§ 77-2001 to 77-2008.02"

 

Upon the death of the surviving spouse without a power of appointment in the QTIP trust, the assets of the QTIP trust could be considered vested on the first death and on the second death are not subject to inheritance tax.  Review the trust language, a general discretionary power for the trustee may not be considered a vested interest for the beneficiary and subject the surviving spouse’s QTIP to inheritance tax, see §77-2008.03 while a limited power of appointment in the trust will not subject the QTIP to inheritance tax.  The concept is the same as no inheritance tax upon the death of a life tenant where the remaindermen have a vested interest.

 

Stepped up basis and federal estate tax are a different matter, on the death of the surviving spouse the QTIP trust is included in the estate of the surviving spouse for federal estate taxes and the basis is stepped up.

 

***Upon further reflection, to have the QTIP a part of the estate of the surviving spouse for stepped up basis on the second death, the first to die must elect the QTIP to be included as marital deduction assets.  The filing of a 706 for the first death appears to me to be mandatory but not unwarranted since a 706 is needed anyway to preserve portability.

 

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