Right now, gifts to trusts can take advantage of high tax exemptions and remove future appreciation of assets from taxable estates. One example available to spouses is making a gift to a trust that allows for a qualified terminable interest property (QTIP) election.
Using this kind of trust as the recipient of the gift allows the donor spouse creating the trust to provide for a recipient spouse and wait at least nine months (potentially as long as 21) to decide how the gift should be treated for tax purposes, said Sally E. Day, a CPA and managing director at Crowe LLP and leader of the Florida private client services group in Tampa, Fla. The reason for the extra time: The election can be made on the 2021 gift tax return filed next year.
Spouses are named as the primary beneficiary of the trust, and during their lifetime they must be the only beneficiary of the trust entitled to income and/or principal of the trust. “The spouse’s lifetime interest would provide that they receive all income at least annually,” said Brandon Baker, a CPA, partner and trust, estate and gift tax practice leader at Friedman LLP’s Philadelphia office.
“The real advantage … is that the QTIP election is made on the 2021 gift tax return, which is filed in 2022, and the choice can be made at that time on how much of the transfer will be subject to tax,” added Azriel J. Baer, counsel in the trust and estates group at the law firm Farrell Fritz in Uniondale, N.Y.
The estate and gift tax exemption, currently $11.7 million per individual, is slated to sunset in 2025. The current mood for tax legislation favors curtailing that exemption sooner. “The uncertainty of when the exemption may be reduced makes flexibility in planning techniques very attractive,” said Michael Roberts, president of Arden Trust Company in Wilmington, Del.
“If an election is made to treat the trust as a QTIP trust, a gift to the trust is eligible for the marital deduction and therefore is not a taxable gift, nor does it use any of the donor’s gift tax exclusion,” said Karen L. Goldberg, principal-in-charge of the trusts and estates group of EisnerAmper in New York.
“Many [clients] are not aware of the flexibility to make a transfer today and decide later whether it uses any lifetime exemption,” Day said, adding that because the recipient spouse is required to receive only income, trust principal can be retained for ultimate distribution to other family members or to anyone else. A QTIP can also protect the recipient spouse and the principal from creditors.
There are important conditions—and limitations—with this strategy. If a QTIP election is not made, all net trust income must be distributed to the beneficiary spouse. “There’s no flexibility for trust income to be accumulated or distributed directly to descendants,” Roberts said.
Also, Baer said property over which the QTIP election is made will be included in the estate of the surviving spouse.
The election can be made over the entirety of or only a portion of the property transferred to trust, however. “We can be tax efficient by making the election to apply to only that portion of the transfer,” Baker said. “Additionally, for [generation-skipping trust] purposes, an election can be made to use the transferor spouse’s GST exemption at the time the QTIP election is made.”
QTIP elections aren’t for everybody, but they can keep a good option open while Washington, D.C., hammers out the immediate future of estate taxes.
“Most of my wealthy clients have not been so risk adverse as to create a QTIP trust. They’re moving forward with making gifts using the current gift tax exclusion, mostly to spousal lifetime access trusts (SLATs),” Goldberg said. But QTIP elections do, she added, remain “a way to hedge against the risk of a client … being on the hook for substantial gift tax if the exclusion is retroactively reduced by the Biden administration.”
