Estate Planning has its own vocabulary. To help you speak the language, we've created a glossary of the more commonly used words and phrases. This glossary is comprised of 26 individual pages, one for each letter of the alphabet. To find a particular word or phrase that starts with the letter "Q" - simply scroll down the list below. If your word or phrase starts with another letter, please use the alphabet index below.
The term "QDOT" is an acronym for "Qualified Domestic Trust." Some people prefer to use the acronym "QDT," but we'll refer to this type of trust as a QDOT. Qualified Domestic Trusts were created under the Technical & Miscellaneous Revenue Act of 1988 (TAMRA), effective for decedents dying after November 10, 1988. Prior to TAMRA, the unlimited marital deduction was not allowed when property passed to a surviving spouse who was not a United States citizen. The creation of QDOTs was designed to provide a mechanism whereby property could pass to a non-U.S. citizen spouse and still qualify for the unlimited marital deduction.
For a more detailed explanation, see "Qualified Domestic Trusts (QDOTs)" .
The term "Qualified terminable interest property (QTip)" refers to property that is qualified for the unlimited marital deduction even though a surviving spouse has only a terminable interest in that property. Some explanation may be helpful. Historically, property transfers from one spouse to another have not been subject to the gift or estate tax. The reason is simply because most couples depend upon their combined assets for their financial security. If a gift or estate tax was levied every time one spouse transferred property to the other, their combined assets would be seriously depleated and their financial security may well be placed in jeapardy. Remember, the gift and estate tax rates reach as high as 35% of the value of the property transferred for 2011 and 2012. This problem is exacerbated in the event of one spouse's death because, at that time, the surviving spouse may well be dependent upon receiving all of the deceased spouse's assets in order to maintain his or her standard of living.
Exempting inter-spousal transfers from the gift and estate tax has been accomplished through an unlimited marital deduction. In other words, property transferred from one spouse to another is subject to the tax, but a corresponding deduction is given for 100% of the value of the property transferred. The result is that no tax is due. And, this result obtains regardless of how much property is transferred to one's spouse.
The unlimited marital deduction is not the result of a benevolent government at work. The unlimited marital deduction does not forgive the tax, it simply defers it until the surviving spouse dies. The key, then, to qualifying for the unlimited marital deduction is some degree of certainty that the property will be subject to tax in the surviving spouse's estate. Accordingly, the tax laws provide that certain requirements must be met in order to provide that certainty: First, the recipient of the property must be a bona-fide spouse, as determined under applicable state law. Second, the surviving spouse must be a U.S. citizen and, third, the surviving spouse must not have a terminable interest in the property.
The first requirement (i.e., that the recipient must be a bona-fide spouse, as determined under applicable state law) now presents some problems that didn't exist in the past, considering the uncertainty of same-sex marriages in many states. The second requirement (i.e., that the surviving spouse must be a U.S. citizen) is fairly staight forward. Since the estate tax laws do not apply to anyone who is not a citizen of the United States and is not resident in this country, there is no certainty that the property would be subject to the estate tax if the surviving spouse is not a citizen of the United States at the time of the first spouse's death. After all, a non-citizen spouse could take the property out of the country and never have it subject to the estate tax. For non-citizen spouses, see "qualified domestic trust" or "QDOT."
The third requirement probably needs some explanation. A "terminable interest," as defined under the tax laws, is an interest that terminates or fails because of a lapse of time, or the occurrence of an event or contingency, or the failure of an event or contingency to occur. The treasury regulations provide that life estates, terms for years, annuities, patents, and copyrights are examples of a terminable interest because those property rights terminate after a certain period of time. The real issue here is that these types of property interests may well expire before the surviving spouse dies so that they would not be subject to the estate tax in the surviving spouse's estate. That being the case, the federal government wants this type of property taxed in the estate of the first spouse to die and, therefore, denies the marital deduction for this type of property transfer.
On the other hand, if a deceased spouse gives property outright to the surviving spouse, then the terminable interest rules never come into play because an outright gift, by definition, is not subject to termination for any reason. There are no strings attached with an outright gift - and that includes the right to say who gets the property upon the death of the recipient. With an outright gift of property, the federal government knows that it will be subject to the estate tax upon the surviving spouse's death - that is, if the surviving spouse still owns it at that time. The federal government doesn't care what you do with the property after you receive it. Instead, it simply looks at the nature of the gift at the time the gift is made (i.e., upon the death of the first spouse to die) and, if the gift is not subject to a terminable interest at that time, then the marital deduction is allowed.
What happens, then, if the deceased spouse puts property in trust for the surviving spouse? Under the typical marital trust (i.e., the "A" trust in the typical "A/B" trust arrangement), the deceased spouse would gift property in trust to be held by a trustee for the benefit of the surviving spouse. The primary purpose of the marital trust was to preserve and maintain property for a surviving spouse with little or no investment or financial expertise. In almost all cases, the surviving spouse was given the power to direct the disposition of the trust property following his or her death because the primary beneficiaries were the children of the deceased spouse as well as the surviving spouse. Moreover, allowing the surviving spouse to make that decision was often preferable because it provided an opportunity for trust property to be directed to the children according to their needs. From a legal standpoint, the fact that the surviving spouse had the power to appoint the trust property upon his or her death was tantamount to complete ownership of the trust property. In other words, the surviving spouse did not have a terminable interest in the property and, accordingly, the deceased spouse's estate was entitled to claim the marital deduction for all property given to the marital trust.
That arrangement worked just fine as long as the children of the deceased spouse were also children of the surviving spouse. However, it doesn't work so well in second-marriage situations with children from a prior marriage. Consider the following scenario: Assume that John, a widower with three grown sons, marries Helen with one daughter from a previous marriage. In planning his estate, John wants to provide for Helen if he should die, but he also wants his property to go to his three sons when Helen dies and not to Helen's daughter. Giving his property outright to Helen is not a good idea, since Helen may decide to give all the property to her daughter and not his three sons. So, John thinks a marital trust might be the answer.
Problem is, a marital trust isn't a good solution either. In order to insure that John's three boys get the trust property after Helen dies, John has to draft the trust instrument so that his three sons are the sole beneficiaries of the trust property when Helen dies. Helen cannot be given any right to name the beneficiaries upon her death. But that creates a terminable interest under the tax laws as far as Helen is concerned, since her interest in the trust terminates upon her death. Because Helen has a terminable interest, John's estate will not qualify for the marital deduction, which means that estate taxes will have to be paid when John dies. With estate tax rates as high as 45%, the amount of property ending up in the trust will be substantially reduced. With a typical marital trust, you can direct the assets upon your surviving spouse's death or you can defer the estate tax until your surviving spouse dies, but you can't have it both ways.
For this reason, the tax laws were changed in 1981 to create an exception to the "terminable interest" rules. The exception allowes certain interests in property to qualify for the marital deduction even though the surviving spouse's interest terminates upon death. This exception, which creates so-called "Qualified Terminable Interest Property" ("Q-Tip"), was specifically aimed at property held in trust for surviving spouses in second marriage situations. It provides that a surviving spouse's interest in property will qualify for the marital deduction even though the surviving spouse does not have the power to appoint the property upon his or her death. However, in order to qualify as "Qualified Terminable Interest Property," four (4) requirements must be satisfied:
|The surviving spouse must have a lifetime right to all of the income of the trust, which must be payable to the surviving spouse annually or more often.|
|No person can have a power, during the surviving spouse’s lifetime, to appoint any part of the property to any person other than to the surviving spouse.|
|The surviving spouse must be the sole lifetime beneficiary of the trust.|
|The executor of the deceased spouse's estate must make an election to treat all or a specific portion of the trust property as qualified terminable interest property.|
Today, a trust that holds Qualified Terminable Interest Property is called a "Qualified Terminable Interest Property Trust" or "QTIP Trust." Once again, property placed in a QTIP Trust qualifies for the unlimited marital deduction even though the surviving spouse does not have the right to designate the beneficiaries of the trust property upon his or her death. Accordingly, no estate tax is paid on this property when it is put into the trust. Instead, it is paid when the surviving spouse dies.
One further point. If Qualified Terminable Interest Property (QTIP) is subject to the estate tax in the surviving spouse's estate, even though the surviving spouse does not have the right to designate the beneficiaries of that property, then where does the surviving spouse get the money to pay the estate tax? Fortunately, the tax laws provide that any increase in the estate tax payable by the surviving spouse's estate [as a result of the Qualified Terminable Interest Property (QTIP) being included in his or her estate] will be paid from the Qualified Terminable Interest Property (QTIP), not from the surviving spouse's property. A QTip Trust, then, is an ideal vehicle to use when there are children from a second marriage or when there is a possibility that a surviving spouse may remarry.
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