QTIP Election: The #1 Mistake That is Made [Illustration]

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Paul Sundin, CPA

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A Qualified Terminable Interest Property (“QTIP”) is an estate planning tool that can serve many purposes. If structured correctly, it can allow one person to receive the income generated from certain trust assets, with the property going to a final beneficiary in the future.

But questions persist. How do you make a QTIP election? What form or schedule needs to be filed? Who makes the election?

In this post, we answer these questions regarding the QTIP election and offer up some tips along the way. Let’s get going.

What is a QTIP?

A QTIP is often used with a married couple. Each spouse has the ability to set up a QTIP trust, essentially leaving assets to the other in trust. 

When the first spouse passes away, the surviving spouse gets what is often referred to as a “life estate” in the assets that are left in the QTIP trust. A life estate essentially entitles the spouse to income that is generated in the trust. If there is real estate in the QTIP, the surviving spouse can live in the property until he or she passes away. 

The key point is that only the surviving spouse can be named as the life beneficiary. However, the surviving spouse does not have any ownership rights in the trust assets. In addition, they cannot sell or transfer the trust assets. 

Upon the death of the second spouse, all trust assets will go to the “final beneficiary” named in the trust. The final beneficiaries are usually the children of the married couple and often can be children or family members from a prior marriage.

How do you Make a QTIP Election?

A QTIP election is made under Section 2056(b)(7) of the tax code. It allows the marital deduction in the case of qualified terminable interest property. 

But the decedent’s executor must make an affirmative election as a requirement to allow the deduction. This election must be made on the estate tax return filed by the executor and, once made, is irrevocable. A percentile or fractional election is entitled to be made.

The QTIP Election

A big advantage of a QTIP trust is the flexibility it provides the surviving spouse. When the first spouse dies, the surviving spouse is not required to implement the QTIP. This could be because of estate tax laws (federal or state) or changes in the family’s financial condition. This gives the surviving spouse some flexibility to elect. 

The official decision resides with the person you have named as the executor of your will. In reality, this may or may not be your spouse. 

To actually create the QTIP trust, the executor must make what is called a “QTIP election” on the estate tax return that is filed for the estate of the first spouse to pass away.

To make the election, the executor must list on a schedule attached to the estate tax return the assets that are going into the QTIP trust. The executor may choose to put some or all of the deceased spouse’s assets earmarked for the QTIP into the trust. 

The election is permanent. Once it is made and the estate tax return is filed, it’s irreversible. 

What is a Partial QTIP Election?

When completing Schedule M, the executor has the ability to pick and choose certain assets to go into the QTIP. If the executor elects to have only certain assets go into the QTIP, then this is considered a partial QTIP election

How to Complete Schedule M for Estate Form 706

Take a look at Schedule M to Form 706 below:

The executor should check the will and any trust documents carefully for a QTIP trust. If one exists, you can either:

  • Elect to claim the marital deduction for the QTIP by listing the property on Schedule M and deducting it (that’s all it takes to elect it)
  • Elect out of the QTIP and, as a result, not get the marital deduction

In either situation, list the property on line A1 of Schedule M. If you’re choosing not to make the QTIP election (to elect out), make sure to specifically identify the trust as being excluded from the election. It is important to remember that any property that falls under the election will be included in the decedent’s spouse’s estate when he or she dies.

When to Elect Out of the QTIP?

So when should you consider to elect out? When the surviving spouse’s estate is substantially larger than the decedent’s, and you are concerned about increasing it further and crossing over into a higher tax bracket

Of course, when you decide to elect out, even though the property is listed on Schedule M, you may exclude it from the total and take it as a marital deduction.

The #1 Mistake We See

It might be surprising to hear that the #1 mistake we see is when executors try to make the election and file form 706 by themselves. Making a QTIP election should not be done by a novice. Make sure to review your situation with a qualified CPA and estate attorney.

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Estate CPA

Gilbert, AZ