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Marital Trusts: The QTIP and the A/B/C Structure

The unlimited marital deduction under IRC §2056, “Bequests, etc., to surviving spouse” lets you leave any amount to a citizen spouse free of estate tax. The catch: leaving everything outright also hands the survivor total control to spend it, remarry, and redirect your half to a new family—the exact blended-family failure the chapter warned about earlier. The Qualified Terminable Interest Property (QTIP) trust solves both at once.

A QTIP ( IRC §2056(b)(7)) pays the surviving spouse all trust income for life and may give access to principal, which qualifies the trust for the marital deduction so no tax is due at the first death. But you—not the survivor—name who receives the remainder when the spouse dies. That is how you provide for a second spouse for life while guaranteeing the principal lands with your own children. The trade-off is that QTIP assets are included in the survivor’s estate at the second death ( IRC §2044), so the tax is deferred, not eliminated—and the assets get a second basis step-up, which is often the point.

In practice these combine into the classic structure that splits a couple’s estate at the first death. Check the lettering against your own document before you assume anything—California practice numbers these in the order below, but drafters are not consistent, and a plan that calls the marital trust “A” is describing the same machinery with different labels:

Trust A (Survivor’s Trust)

The survivor’s own half of the community property plus whatever is left to them outright. Revocable by the survivor, fully theirs, and in their estate.

Trust B (Bypass/Credit Shelter/Exemption Trust)

Funded up to the deceased spouse’s exemption. Irrevocable. Excluded from the survivor’s estate, so all future appreciation escapes tax at the second death (section “Bypass Trusts”). No second step-up.

Trust C (Marital/QTIP)

Funded with whatever is needed beyond the exemption to defer all tax via the marital deduction. All income to the survivor for life; irrevocable, with remainder beneficiaries the deceased spouse chose; included in the survivor’s estate under IRC §2044, and so gets a second step-up.

A disclaimer trust is a different animal that people confuse with this one. There, everything passes to the survivor outright and the survivor decides, within nine months, whether to disclaim some portion into a bypass trust. It buys maximum post-mortem flexibility at the cost of control: the survivor can simply decline to disclaim, and your bypass planning evaporates. The QTIP election is made return-by-return on Form 706, which gives the executor a powerful post-mortem lever (section “Post-Mortem Planning: The Levers You Pull After Death”): fund the bypass trust only to the extent it helps, and QTIP the rest. A separate reverse-QTIP election ( IRC §2652(a)(3)) lets you keep the deceased spouse’s GST exemption attached to QTIP assets so it is not wasted.

A Worked Example Frank dies in 2026 with a $20 million estate. It is his second marriage: he has two children from his first and wants his wife Susan supported for life, but the principal to land with his kids, not Susan’s children or a subsequent spouse. His plan splits the estate at death:

Estate tax at Frank’s death: $15 million covered by the exemption, $5 million by the marital deduction, for a total of zero. Now compare the lazy alternative—leaving the whole $20 million to Susan outright. That also produces zero tax at Frank’s death (unlimited marital deduction), but Susan can rewrite her will and leave every dollar to her own children, disinheriting Frank’s. The QTIP buys the same tax result while removing that option.

The two trusts then diverge at Susan’s death. Say the assets have grown: the bypass trust to $21 million, the QTIP to $7 million. The bypass trust passes to Frank’s children outside Susan’s estate—its $6 million of growth never taxed, though it gets no second step-up. The $7 million QTIP is pulled into Susan’s estate under IRC §2044 (covered by her own $15 million exemption, so likely still no tax) and does get a second basis step-up, wiping out the gain for the children. Frank provided for his widow, guaranteed his bloodline, deferred all tax, and captured a step-up where it counted. If grandchildren were the remainders, the reverse-QTIP election would have preserved Frank’s GST exemption on that $5 million as well.

The Non-Citizen Spouse Trap: QDOT The marital deduction is not available when the surviving spouse is not a US citizen—Congress assumes a non-citizen may leave the country with the assets before the IRS can tax them at the second death. To defer the tax anyway, the property must pass to a Qualified Domestic Trust (QDOT) under IRC §2056A: at least one trustee must be a US citizen or domestic corporation, the trust must withhold estate tax on most principal distributions during the spouse’s life, and large QDOTs must post security or use a bank trustee. A non-citizen spouse can also become a citizen before the return is filed and sidestep the QDOT entirely. This applies regardless of your citizenship; it turns on the survivor’s.

The same rule bites during life, and this is the version couples actually trip over. Gifts to a citizen spouse are unlimited; gifts to a non-citizen spouse are capped at an annual exclusion of $194,000 for 2026 (indexed) under IRC §2523(i). Retitling a brokerage account into joint names, adding a spouse to a deed, or funding their separate account can blow through that ceiling and consume lifetime exemption without anyone filing a Form 709. If one of you is not a citizen, audit the titling before you audit the will. See the broader treatment of mixed-citizenship couples in section “Titling and Beneficiary Designations”.

The house is the hard part. In a second marriage the asset that generates the fight is rarely the portfolio — it is the home the survivor is living in. The instinctive fix, and the one every advice column proposes, is to let the surviving spouse stay in the house “for a few years” with the remainder to your children. Draft it that way and you have created a terminable interest: an occupancy right for a fixed term fails the “for life” requirement of IRC §2056(b)(7), so it earns no marital deduction. Harmless if the estate sits under the exemption; expensive if it does not.

The structure that works is to put the residence inside the marital trust and give the survivor the right to occupy it rent-free for life, which can serve as the qualifying income interest provided the drafting does not let the trustee’s powers strip the survivor of beneficial enjoyment and the survivor can compel the trustee to sell or make the property productive ( Treas. Reg. §20.2056(b)-5(f)(4)). The basis consequence is the reason to prefer this over a bare life estate written into the will: trust property is pulled back into the survivor’s estate under IRC §2044 and takes a second step-up, while a life-estate-and-remainder created at your death fixes your children’s basis at the first death and gives them nothing at the second.

Then write down the operating terms, because this is where these arrangements actually fail. Who pays property tax, insurance, utilities, and ordinary maintenance — and who funds a new roof, a failed foundation, or a special assessment? A life tenant nearing eighty has every incentive to defer capital spending your children will inherit the consequences of. What ends the right: remarriage, cohabitation, a permanent move into assisted living, failure to occupy for some number of consecutive months? Name the terminating events and the payment obligations in the instrument. A trust that says only “my spouse may reside there” has handed your widow and your children a decade-long argument with no referee.

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