What Is Section 2044 and Its Effect on QTIP Trusts?

When a person dies, their assets are subject to estate tax, but tax law provides exceptions for property left to a surviving spouse. This can create a situation where the tax obligation is not eliminated but postponed until the surviving spouse passes away. This deferral ensures that the assets are eventually subject to tax without jeopardizing the surviving spouse’s financial security. The mechanism for this is a specific trust arrangement with consequences for the surviving spouse’s estate.

For an individual who dies in 2025, federal estate tax applies only if their estate’s value exceeds $13.99 million. This exemption is portable between spouses, allowing a married couple to shield up to $27.98 million from the tax. Because of this, the rules discussed here currently affect a small percentage of estates. However, this high exemption is scheduled to revert to an inflation-adjusted amount of approximately $7 million at the beginning of 2026, which will make these rules relevant to more families.

The Role of the QTIP Trust

A Qualified Terminable Interest Property (QTIP) trust is an estate planning tool that allows a grantor to provide for their surviving spouse after death. The surviving spouse receives all income from the trust’s assets for life, paid at least annually. The grantor, however, retains control over the ultimate disposition of the trust’s assets, dictating who receives the property after the surviving spouse dies. This is common in situations involving children from a previous marriage, where the grantor wants to provide for their current spouse while ensuring their children are the final beneficiaries.

The creation of a QTIP trust is linked to the unlimited marital deduction. This provision in the U.S. tax code allows an individual to transfer an unlimited amount of assets to their spouse, including at death, free from federal estate or gift taxes. When assets are placed into a properly structured QTIP trust for a surviving spouse, they qualify for this marital deduction. This means the value of the assets is deducted from the first spouse’s gross estate, reducing or eliminating their estate tax liability.

This tax benefit requires a “QTIP election,” a formal choice made by the executor of the first spouse’s estate on the federal estate tax return, Form 706. By making this election, the executor declares the trust property as qualified for the marital deduction. This act defers the estate tax that would have otherwise been due. Without this election, the property would be taxed in the first spouse’s estate.

This election carries a future consequence. While it provides an immediate tax benefit for the first spouse’s estate, it sets up a future tax event. The decision to take the marital deduction on the QTIP assets is an agreement that those same assets will be included in the surviving spouse’s estate later on, ensuring the property is taxed at the death of the second spouse.

Including Property in the Surviving Spouse’s Estate

The estate tax deferral through a QTIP trust ends upon the death of the surviving spouse. The Internal Revenue Code then mandates that the full value of the QTIP trust property be included in the surviving spouse’s gross estate for tax purposes. This inclusion is the direct consequence of the QTIP election that allowed the property to pass tax-free initially.

The logic behind this rule is to ensure that assets that received the benefit of the marital deduction are eventually subject to the estate tax system. The tax was not forgiven, merely postponed. By including the QTIP assets in the surviving spouse’s estate, the Internal Revenue Service (IRS) completes the tax cycle, preventing the assets from passing to the next generation untaxed.

For valuation purposes, the QTIP property is treated as if the surviving spouse owned it outright. The assets are assessed at their fair market value 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 would decrease the gross estate’s value and the tax due. This valuation determines the amount added to the surviving spouse’s other assets to calculate the total taxable estate.

This inclusion is not optional. If a QTIP election was properly made for the first spouse’s estate, the inclusion in the second spouse’s estate is automatic. The surviving spouse cannot alter this outcome, even though they may have had no control over the ultimate destination of the trust’s principal. The rule ensures the tax benefit granted to the first estate is balanced by a tax liability in the second.

Estate Tax Reporting and Liability

Following the death of the surviving spouse, their executor has specific responsibilities related to the QTIP trust. The executor must report the fair market value of all QTIP assets on the surviving spouse’s federal estate tax return, Form 706. This value is combined with the surviving spouse’s personal assets to determine the total gross estate and calculate the estate tax owed.

A question arises as to who bears the financial burden of the tax generated by the QTIP assets. The surviving spouse’s estate is legally responsible for paying the entire estate tax bill to the IRS. This could unfairly deplete the assets intended for the surviving spouse’s own beneficiaries, who may be different from the QTIP trust’s remainder beneficiaries. To address this, the tax code provides a mechanism for the estate to seek reimbursement.

This mechanism is the right of recovery, allowing the surviving spouse’s estate to recover the portion of the estate tax attributable to the QTIP property. The amount is the difference between the actual tax paid and the tax that would have been due if the QTIP assets had not been included. This recovery is sought from the person or entity receiving the QTIP property, such as the trust or its beneficiaries.

The right of recovery is the default rule, but it can be overridden. The surviving spouse can waive this right in their will or revocable trust, but the waiver must be clear and refer directly to the QTIP tax to be effective. A general statement directing all taxes to be paid from the residuary estate is often insufficient. If the right is waived, the surviving spouse’s own assets will pay the tax on the QTIP property, benefiting the trust’s remainder beneficiaries at the expense of their own.

Basis Adjustment for QTIP Assets

The inclusion of QTIP trust assets in the surviving spouse’s gross estate has an income tax consequence for the beneficiaries who inherit the property. Because the assets are treated as part of the estate for tax purposes, they receive an adjustment to their cost basis. This is often called a “step-up” in basis, but it can also be a “step-down.”

The beneficiaries’ new cost basis in the inherited assets becomes the fair market value of those assets on the date of the surviving spouse’s death. This means any appreciation in the assets’ value that occurred during the surviving spouse’s lifetime is erased for capital gains tax purposes. The beneficiaries are treated as if they purchased the assets for their value at the time of death.

This basis adjustment can provide a tax benefit. If the beneficiaries sell the inherited assets shortly after the surviving spouse’s death, the sale price will likely be close to their new, stepped-up basis. This results in little to no capital gain to report and little to no capital gains tax due. This is a separate tax consideration from the federal estate tax, affecting the income tax liability of the beneficiaries.