Marital Deductions - Terminable Interest Rule and Exceptions
Terminable Interest Rule and Exceptions
Generally, no marital deduction is allowed for property interests that are terminal interests. A terminal interest is an interest in property that will terminate or fail on the lapse of time or on the occurrence, or failure to occur, of some event or contingency. An example is property given to a surviving spouse that would revert to the children if the surviving spouse remarries. The purpose of this rule is to require that, if property is transferred to the surviving spouse, it will be included in the surviving spouse's estate unless disposed of during the surviving spouse's lifetime. This means that whenever a trust between spouses is lacking and conditions are attached to gifts or bequests, the use of the marital deduction is on shaky ground.
There are four exceptions to the terminal interest rule, which generally stipulates that the property interests in question will qualify for the marital deduction if certain requirements are met. The exceptions include:
- Survivorship Condition – Under Section 2056(b)(3), a bequest to a spouse may be conditioned on their survival for a period up to six months after the death of the decedent.
- General Power of Appointment – This is the right to determine the ultimate disposition of certain designated property, dictated by section 2056(b)(5) of the IRC code. The survivor must have a life interest that entitles them to all of the income and must have the power to appoint the property to self or estate.
- An Interest Income – Under 2056(b)(7), the survivor must have an income interest in a charitable remainder unitrust or annuity trust where they are the only non-charitable beneficiary. These conditions apply automatically; however, the executor can elect for these provisions not to apply.
- Qualified Terminable Interest Property (QTIP) – With a QTIP, under section 2056(b)(8) the estate owner can control the disposition of the remaining interest after the surviving spouse's death. The remaining interest will, however, be included in the surviving spouse's estate. The surviving spouse receives the income from the property for life, with the remaining interest passing to the children or other designated beneficiaries at death.