Reverse QTIP election, potential conflict between surviving spouse and remainder beneficiaries, and other issues.

By N. Dean Hawkins

 

ADVANTAGES

First Spouse to Die Can Control Disposition

QTIP trusts, unlike any other form of marital deduction transfer, allow the first spouse to die to control the disposition of his or her property after the death of the surviving spouse.

QTIP trusts are often used for this purpose, particularly when the spouses have been previously married and have children from prior marriages.

Not Included in Probate Estate

The assets remaining in a QTIP trust upon the death of the surviving spouse will not be either:

  • Part of the probate estate of the surviving spouse or subject to probate proceedings.
  • Subject to the claims of the surviving spouse’s creditors.

Post-Mortem QTIP Election Decisions

The availability of the marital deduction under IRC §2056(b)(7) and the resulting inclusion of the property in the QTIP trust in the surviving spouse’s gross estate is contingent upon the executor of the first spouse to die making a QTIP election.

In certain situations, it may be more advantageous to decline to make the QTIP election. In other situations, making a partial QTIP election, which is permissible, may be more advantageous.

A QTIP trust allows the executor of the first spouse to die to make these decisions after the death of the first spouse.

[For more, see §11:92.]

Reverse QTIP Election

With a QTIP trust, a reverse QTIP election may be made. [See IRC §2652(a)(3).]

A reverse QTIP election permits the executor of the first spouse to die to elect that the QTIP trust will continue to be treated, for purposes of the GST, as property transferred by the first spouse to die, even though the trust property is otherwise treated as belonging to the surviving spouse for estate and gift tax purposes.

Typically, a reverse QTIP election is made to allow the first spouse to die to utilize a portion of the GST exemption that otherwise might not be used. A reverse QTIP election is only necessary when the amount of the GST exemption exceeds the applicable exclusion amount. Presently, the amount of the GST exemption is equal to the applicable exclusion amount. [See IRC §2631(c). For more on reverse QTIP elections, see §11:110.]

DISADVANTAGES

Conflicts Between Surviving Spouse and Remainder Beneficiaries

The primary disadvantage of a QTIP trust is the potential conflict between the surviving spouse and the remainder beneficiaries that may arise in regard to investment strategy, tax strategy, adequacy of accountings, and trust administration.

The potential for conflict is attributable to the surviving spouse’s lack of control over the remainder interest and the ability of the first spouse to die to control the disposition of his or her property after the death of the surviving spouse, which is of course the primary advantage of a QTIP trust.

The likelihood for conflict depends on:

  • The relationships between the settlors and the designated remainder beneficiaries.
  • The assets and income of the surviving spouses from sources other than the QTIP trust.

Inability to Obtain Funds to Make Tax Advantageous Gifts

Even though the requirements for QTIP trusts to qualify for the marital deduction do not prohibit granting powers to the surviving spouse to withdraw principal from the trust, the typical QTIP trust does not grant liberal withdrawal powers to the surviving spouse.

Such withdrawal powers, if granted, might be exercised by the surviving spouse to defeat the objectives of the first spouse to die regarding the division of the remainder interest upon the death of the surviving spouse.

Due to the surviving spouse’s lack of withdrawal powers, he or she may not be able to obtain from the QTIP trust the necessary funds to make inter vivos gifts to the next generation, even when the gifts would fall within the annual exclusion in IRC §2503(b). This is inconsequential if the surviving spouse has access to other assets with which to fund the gifts.


N. Dean Hawkins has a general tax practice in Dallas, including estate planning, business tax planning, and tax controversy and litigation.  Mr. Hawkins has an LL.M. in Taxation from New York University, and is the author of Texas Trusts & Clauses, from which this article is excerpted.