• Terminable Interests: A
terminable interest is one that will end after a period of time or when a
contingency occurs or fails to occur (life estates, annuities, etc.). A
terminable interest is not deductible if the donor retained an interest or
gave another interest in the same property to someone other than the
spouse and that person may possess or enjoy the property after the
spouse’s interest terminates. [IRC §2523(b)(1), §2056(b)(1)]
Terminable Interests that Qualify for
the Marital Deduction: Terminable
interests that will be included in the gross estate of the surviving
spouse are deductible:
• Life Estate with Power of Appointment: (1)
spouse is entitled for life to all income paid at least annually, (2)
spouse alone has the power to appoint the entire interest to
himself/herself; and (3) no other person has power to appoint any part of
the interest to anyone else. [IRC §2523(e), §2056(b)(5)]
• Joint Tenancies & Tenancies by the
Entirety: If one spouse gives
property to the other by creating a joint tenancy or tenancy by the
entirety, the gift is not considered a terminable interest if the spouses
are the only tenants. [IRC §2523(d)]
• Qualified Terminable Interest Property
(Q-TIP): A donor may elect to treat
otherwise nondeductible property as Q-TIP property. Q-TIP property
qualifies for the marital deduction but, in exchange for this treatment,
the property must be included in the donee’s gross federal estate. The
election is made on the donor’s gift or federal estate tax return. The
Q-TIP election is used to shift property owned by one spouse to the
taxable federal estate of the other. It allows the donor spouse to apply
both spouse’s unified credits without giving the recipient spouse
control of the property. Q-TIP elections are most commonly used to provide
for a surviving spouse while passing property to children from a former
marriage. Q-TIP treatment can be elected for property if: (1) spouse is
entitled for life to all income paid at least annually, and (2) no one has
a power to appoint any part of the property to any person other than the
spouse while the spouse is living. [IRC §2523(f) and 2056(b)]
