This article originally appeared in the May 2025 issue of The Tax Adviser.
Since the enactment of the Economic Recovery Tax Act of 1981, P.L. 97-34, qualified terminable interest property (QTIP) trusts have become an integral part of estate planning for many married couples, especially for spouses who were previously married and have children from a prior marriage. QTIP trusts typically provide lifetime financial security and asset protection for the surviving beneficiary-spouse while offering the grantor-spouse estate tax deferral along with control over the ultimate disposition of the trust assets after the beneficiary-spouse’s death.
Despite the benefits of QTIP trusts, a beneficiary-spouse may on occasion find a trust’s terms too restrictive, overly burdensome, or simply unwanted, prompting a desire to commute the beneficial interest and terminate it; gift or sell a portion of it to others; or perhaps purchase the remainder interests, permitting all trust assets to be distributed outright to the beneficiary-spouse. As the recent case of McDougall, 163 T.C. No. 5 (2024), highlights, before a beneficiary-spouse exits a QTIP trust, the special gift tax rules applicable to QTIP trusts under Sec. 2519 must be carefully analyzed to avoid, or at least minimize, potential adverse gift tax consequences to all beneficiaries involved.
BDO’s James Head provide details in the full article in The Tax Adviser.