IRC 2044: Including QTIP Property in the Gross Estate

Internal Revenue Code (IRC) Section 2044 is a federal estate tax rule dictating that certain property, for which a marital deduction was previously claimed, must be included in the surviving spouse’s gross estate. This rule functions as a deferred tax measure. When the first spouse dies, their estate can deduct the value of assets left to the surviving spouse, reducing or eliminating any immediate estate tax. Section 2044 ensures this deferral is not permanent by requiring the property’s value to be included in the surviving spouse’s taxable estate upon their death, completing the transfer tax cycle.

The Foundation of IRC 2044 The QTIP Election

The application of IRC Section 2044 depends on a Qualified Terminable Interest Property (QTIP) election made in the first spouse’s estate. A QTIP trust is a specific type of trust that allows a person to provide for their surviving spouse while controlling the ultimate disposition of the assets. For a trust to qualify, the surviving spouse must be entitled to all income from the property for life, payable at least annually.

During the surviving spouse’s lifetime, no one, including the spouse, may have the power to appoint any part of the trust’s property to anyone other than the surviving spouse. This ensures the spouse has exclusive lifetime benefit from the assets, even though they do not control who inherits the property after their death. This feature is useful in situations involving second marriages, where a person may want to provide for their current spouse while ensuring their children from a prior marriage are the ultimate beneficiaries.

The executor of the first deceased spouse’s estate makes an irrevocable QTIP election on the United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706. By listing the property on Schedule M of the return, the executor claims a marital deduction for the assets placed in the trust. This act secures the immediate tax deduction and subjects the property to inclusion in the surviving spouse’s estate later under IRC 2044.

Inclusion of Property in the Gross Estate

Upon the death of the surviving spouse, IRC Section 2044 mandates that the full fair market value of the property held within the QTIP trust must be included in the surviving spouse’s gross estate. This is not an optional inclusion; if a QTIP election was properly made for the first spouse’s estate, the inclusion in the second spouse’s estate is automatic.

The amount included is the value of the entire trust principal, not merely the income interest the spouse enjoyed. This valuation is determined as of the date of the surviving spouse’s death. The executor may instead elect the alternate valuation date, six months after death, if it results in a lower estate tax liability. Any undistributed income that has accrued up to the date of death is also included in the gross estate.

This inclusion effectively treats the surviving spouse as the owner of the QTIP assets for estate tax purposes, even though they had no power to decide the property’s final beneficiaries. The value of the QTIP property is added to the surviving spouse’s other assets, and the total is used to calculate the estate tax due.

Lifetime Dispositions and Gift Tax Implications

IRC Section 2519 addresses situations where a surviving spouse disposes of their interest in a QTIP trust during their lifetime. This rule specifies that if the surviving spouse disposes of any portion of their qualifying income interest, whether by gift, sale, or other means, it is treated as a taxable event.

Such a disposition is treated as a taxable gift of the entire remainder interest in the QTIP trust. For example, if a surviving spouse with a lifetime income interest in a $3 million QTIP trust gives away just 1% of that income stream, they are deemed to have made a taxable gift of the full $3 million remainder. The value of the gift is the fair market value of the entire trust property on the date of the disposition, less the value of the income interest being transferred. The gift is reported on Form 709, the United States Gift (and Generation-Skipping Transfer) Tax Return.

Right of Recovery for Estate Taxes Paid

IRC Section 2207A grants the surviving spouse’s estate a right of recovery for the tax on property the surviving spouse did not control. This right allows the estate to recoup the federal estate tax attributable to the inclusion of the QTIP assets from the individuals or entities who receive the property—the remainder beneficiaries.

The amount of tax that can be recovered is the difference between the total estate tax actually paid by the surviving spouse’s estate and the tax that would have been payable if the QTIP property had not been included. This ensures the surviving spouse’s own beneficiaries are not burdened by the tax liability generated by assets they do not receive. The right of recovery arises once the federal estate tax is paid.

This right of recovery can be waived. The surviving spouse can override this provision by specifically indicating an intent to waive the right in their will or revocable trust. A general statement in a will to pay all taxes from the residue of the estate is insufficient; the waiver must make specific reference to the QTIP property or the right of recovery to be effective. The decision to waive or retain this right is an aspect of estate planning, as it directly impacts the ultimate value of inheritances received by both the surviving spouse’s beneficiaries and the QTIP remainder beneficiaries.