What is a non terminable interest?
: a rule in estate tax law: the value of a property interest that passes to a surviving spouse may not be deducted if it passes from the surviving spouse to another person for less than adequate consideration upon the happening of some event (as the passing of a period of time)
What is a qualified terminable interest property?
Qualified Terminable Interest Trust (QTIP Trusts) are an estate planning tool used to maximize a couple’s applicable exclusion amounts while qualifying for the marital deduction. Full property interest transfers to spouses do not trigger most gift or estate taxes under the marital deduction.
What are the exceptions to the terminable interest rule?
Interest Rule
Each spouse must trust the other implicitly for the marital deduction to work effectively. There are five exceptions to the terminal interest rule: (1) qualified terminal interest property (QTIP), (2) general power of appointment, (3) survivorship condition, (4) right to payment, and (5) income interest.
Do terminable interest qualify for marital deduction?
Terminable interests do not qualify for the marital deduction (Sec. 2056(b)(1)). An example of a terminable interest is where the decedent leaves property to a surviving spouse for the spouse’s lifetime, with a remainder interest to the decedent’s children.
Can surviving spouse make gifts from QTIP trust?
The answer lies in the use of a QTIP Trust. During the husband’s lifetime, he can make unlimited marital gifts to his wife. If he makes them into a QTIP Trust, the assets are qualified for the marital deduction for gift and estate tax purposes.
What is the difference between a marital trust and a QTIP trust?
QTIP Trusts function almost the same as Marital Trusts. They’re both irrevocable trusts that can only name the surviving spouse as beneficiary during that spouse’s lifetime. However, the major distinction between the two is that with a QTIP Trust, the grantor of the trust maintains control of it, even after death.
Do QTIP assets get step up in basis?
The assets payable to the QTIP will get a step up in basis. When the surviving spouse later dies, the entire QTIP will be included in his/her taxable estate which means that the assets in the QTIP will get the second step-up at that time.
How do GRATs work?
Key Takeaways. Grantor retained annuity trusts (GRATs) are estate planning instruments in which a grantor locks assets in a trust from which they earn annual income. Upon expiry, the beneficiary receives the assets with minimal or no gift tax liability. GRATs are used by wealthy individuals to minimize tax liabilities.
What is the difference between a QTIP trust and a marital trust?
What is the terminable interest rule?
A “terminable interest” in property is an interest which will terminate or fail on the lapse of time or on the occurrence or the failure to occur of some contingency. Life estates, terms for years, annuities, patents, and copyrights are therefore terminable interests.
Which is a disadvantage of a QTIP trust?
The main disadvantage of a QTIP trust is conflicts it can generate between the remainder beneficiaries and the surviving spouse. These conflicts can relate to tax strategy, investment decisions, and overall trust administration.
What is the point of a QTIP trust?
A qualified terminable interest property (QTIP) trust enables the grantor to provide for a surviving spouse and maintain control of how the trust’s assets are distributed once the surviving spouse dies.
Are distributions from a GRAT taxable?
During the term of the GRAT, the Donor will be taxed on all of the income and capital gains earned by the trust, without regard to the amount of the annuity paid to the Donor.
Do you file a gift tax return for a GRAT?
The gift tax return is made on IRS Form 709, is filed with the Internal Revenue Service, and is due by April 15 of the year following the calendar year in which the gift is made. Therefore, you need to file a gift tax return for the year in which the GRAT is funded.
What happens at the end of a GRAT term?
The annuity amount is paid to the grantor during the term of the GRAT, and any property remaining in the trust at the end of the GRAT term passes to the beneficiaries with no further gift tax consequences.
Does a GRAT have to file a tax return?
What happens to a GRAT If the grantor dies?
A GRAT that pays the annuity amount to the grantor during his or her lifetime, and to his or her estate if the grantor dies during the term of the GRAT will be included in the value of the retained annuity interest.
How long can a GRAT last?
The minimum duration for a GRAT is two years, and that is a very popular choice for many clients. But longer GRATs are also common, and some clients decide to establish GRATs that last 3, 5 or 10 years.
Who pays income tax on GRAT?
A GRAT is considered a grantor trust, which means that for income tax purposes, you and your trust are indistinguishable. This has two consequences. First, it means that you are responsible for paying income tax on income that the GRAT earns.
Is income from GRAT taxable?
GRATs are taxed in two ways: Any income you earn from the appreciation of your assets in the trust is subject to regular income tax, and any remaining funds/assets that transfer to a beneficiary are subject to gift taxes.
Does a GRAT file a tax return?
With respect to income taxes, the grantor is treated as the owner of the assets during the GRAT term and reports all income earned by the GRAT on his individual income tax return. To avoid having to file its own fiduciary income tax return, the GRAT should not apply for a separate taxpayer identification number.
What happens if grantor dies during GRAT term?
If the grantor dies during the GRAT term, the value of the remainder interest in the trust is included in the grantor’s taxable estate under either section 2036 (retained income, possession, or enjoyment of property) or 2039 (retained right to receive annuity in transferred property).