Generally, a transfer (gift/estate) will not qualify for the marital deduction if the spouse receives only a life estate or other terminable interest and an interest in the property passes to another person who may enjoy the property after the spouse’s interest ends. A marital deduction will, however, be available where property passes from the decedent spouse to:
- a power of appointment trust where the surviving spouse has the right to all income for life and has the power to appoint trust property to him/herself or his/her estate.
- a qualified charitable remainder trust where the spouse is the only non-charitable beneficiary (although in some cases certain ESOP remainder beneficiaries are permitted) or
- a QTIP trust for which the decedent’s executor elects marital deduction treatment.
Such transfers are typically structured in an estate plan via a QTIP Trust. The trust must provide that the spouse:
- be the sole beneficiary during lifetime
- be entitled to all trust income and
- have the right to direct the trustee to invest in income producing assets and no person can have the right to appoint trust property to anyone other than the surviving spouse during his/her lifetime.
However, at the death of the surviving spouse, the transferor spouse would have previously designated the subsequent beneficiaries to receive the trust principal. Under the QTIP arrangement, trust principal will be included in the surviving spouse’s estate for estate tax purposes even though the spouse does not have a general power of appointment over the trust principal.
