There is an often-overlooked strategy when it comes to QTIPs. A reverse QTIP election can be made. But why would you make one? We will discuss.
Why the QTIP?
A QTIP Trust has been allowed since Congress amended §2056 in 1981. The trust holds Qualifying Terminable Interest Property, thus the name QTIP. The trust must provide that there is a mandatory distribution of income to the surviving spouse at least annually, for their lifetime, but upon the death of the surviving spouse, the trust property may pass to the children of others.
The QTIP qualifies for the unlimited marital deduction if the executor elects to claim the marital deduction for the QTIP Trust. The election is irrevocable. There must be a mandatory payment of income without any conditions during the lifetime of the surviving spouse.
The principal may or may not be distributed to the surviving spouse. However, no one other than the surviving spouse may receive any income or principal distributions. During the surviving spouse’s lifetime, no one, not even the surviving spouse, may appoint or distribute the QTIP property to anyone other than the surviving spouse.
Reverse QTIP Election
A reverse QTIP election allows the executor of the first spouse to pass away to elect for the QTIP trust to continue to be treated (for purposes of the GST) as property transferred by the first spouse to die. This is the case even though the trust assets are still treated as belonging to the surviving spouse for gift and applicable estate tax purposes.
As a general rule, a reverse QTIP election allows the first spouse to die to use a portion of the GST exemption that might not be utilized. A reverse QTIP election usually is only done when the amount of the GST exemption is over the exclusion amount.