QTIP Trust for Couples With U.S. Assets: How It Works

A QTIP trust is a trust in which the surviving spouse receives all the income for life, and the executor may elect the assets for the marital deduction from the U.S. federal estate tax (26 U.S.C. §2056(b)(7)). It serves couples with assets in the U.S. If the surviving spouse is not a U.S. citizen, the deduction requires a QDOT (§2056A).

Who does a QTIP trust make sense for?

A QTIP trust makes sense for couples who have assets subject to U.S. estate tax: assets located in the U.S. (real estate, shares of U.S. companies, accounts) or U.S. citizenship or residence of one of the spouses. Without any of these ties, U.S. estate tax is unlikely to be your problem.

For a decedent who was neither a citizen nor a resident of the U.S., the IRS states that U.S. tax applies to the transfer of assets located in the U.S. The executor must file Form 706-NA when the value of those assets, added to the specific gift exemption and to prior taxable gifts, exceeds US$ 60,000. The IRS clarifies that this threshold is not adjusted for inflation.

The QTIP is also used in second marriages, when the settlor wants to guarantee income to the spouse and define in the trust itself who receives what is left afterward. Anyone without assets in the U.S. or a U.S. tie should look first at Brazilian succession, covered below, and at our guide to international succession planning.

What are the legal requirements of the QTIP under the U.S. code?

The general rule of §2056(a) allows deducting from the taxable estate the value of what passes to the surviving spouse. §2056(b)(1) denies the deduction for interests that end with time or with an event, such as a life estate. The QTIP is the exception provided in §2056(b)(7).

To be a QTIP, the asset must meet three conditions in the statutory text:

1. •Pass from the decedent (the settlor) to the trust.
2. •Give the surviving spouse a "qualifying income interest for life": the right to all the income, paid annually or more frequently, and no one may have a power to appoint any part of the asset to anyone other than the spouse during the spouse's life. A power exercisable only at or after the spouse's death does not count as an impediment.
3. •Have an election made by the executor on the estate tax return. Once made, the election is irrevocable.

In short, the spouse receives the income, and the statutory text does not require the spouse to receive the principal. Who receives the assets after the spouse's death is defined by the trust instrument, as long as the requirements above are respected. For what happens to these assets in the surviving spouse's estate, ask the U.S. lawyer for a written projection, since that depends on another section of the code (§2044), which was not part of this review.

How does the QTIP work if the spouse is not a U.S. citizen?

If the surviving spouse is not a U.S. citizen, the marital deduction is denied, and the QTIP alone does not solve it. §2056(d)(1) says that, in that case, no deduction is allowed under §2056(a). The exception in §2056(d)(2)(A) applies to assets that pass to a qualified domestic trust (QDOT).

The QDOT is defined in §2056A(a). The trust must:

• •require, as a rule, at least one trustee who is a U.S. citizen or a U.S. company (domestic corporation);
• •provide that no distribution, other than of income, may be made unless that trustee can withhold the tax due;
• •meet the requirements of the Treasury regulations to ensure collection of the tax;
• •have the executor's election applied to it.

The QDOT does not eliminate the tax. §2056A(b)(1) creates an estate tax on distributions made before the surviving spouse's death and on the assets remaining in the trust on the date of death. The same section has exceptions, such as income distributions.

§2056(d)(2)(B) allows the asset to be transferred to the QDOT up to the date the return is filed. §2056(d)(4) removes the denial if the spouse becomes a naturalized citizen before filing and was a U.S. resident throughout the period after the decedent's death.

Which rule applies in each scenario?

The choice between a QTIP, another type of marital trust or no trust depends on the size of the estate relative to the basic exclusion, the spouse's citizenship and the wish to control the destination of the assets. This is decided with a U.S. estate planning lawyer, case by case.

How does Brazil treat a foreign trust like the QTIP?

Law No. 14,754/2023 (Lei 14.754/2023) treats the assets of a foreign trust as belonging to the settlor, not to the trust. Art. 10 of the law provides that these assets remain under the settlor's ownership after the trust is created. Ownership passes to the beneficiary at the time of distribution or of the settlor's death, whichever occurs first.

The change of ownership is treated by § 2º of art. 10 as a gratuitous transfer: a gift, if it occurs during life, or a transfer causa mortis, if it results from the settlor's death. Income and gains of the trust follow the individual income tax (IRPF) rules applicable to the owner of the assets (art. 10, § 3º). If the trust holds a controlled entity abroad, it is considered to be held directly by the owner (art. 10, § 4º).

Who the settlor is, who the beneficiary is and when the transfer occurs in a QTIP depends on the trust deed. In many QTIPs the trust is born from the death of the first spouse, which changes the analysis. This classification should be confirmed before signing.

Art. 12 defines a trust as a "contractual arrangement governed by foreign law" and defines settlor, trustee, beneficiary and distribution. Art. 13 extends the rules to foreign contracts with similar characteristics. Art. 11 requires the trust's assets to be reported directly on the DAA (annual income tax return), at acquisition cost, as of December 31, 2023.

Art. 10, § 5º, requires the settlor or the beneficiary to request from the trustee the resources and information needed to pay the tax and comply with obligations in Brazil. § 8º is clear: the trustee's refusal or omission does not relieve the Brazilian taxpayer's duty.

For similar structures, see also our article on offshore trusts for Brazilians and the international tax planning service.

Does ITCMD apply to the gift or inheritance that passes through the trust?

ITCMD is the state tax on transfers causa mortis and gifts. The Constitution, in art. 155, I, gives the States and the Federal District the power to institute it on "any assets or rights." § 1º, III, provides that jurisdiction for cases with a foreign element is regulated by complementary law: a donor domiciled or resident abroad, or a deceased who owned assets, was resident or domiciled, or had probate processed abroad.

§ 1º, VI, determines that the tax be progressive according to the value of the share, bequest or gift. Since Law 14,754 classifies the distribution or the settlor's death as a gift or a transfer causa mortis, the incidence, the rate and the deadline depend on the law of the competent State. Consult the applicable state legislation before assuming any number. This article gives no rates because they vary by State.

What do the marital property regime and Brazilian succession change?

Quite a lot. The Civil Code allows engaged couples to stipulate the property regime before the wedding (art. 1,639), and the regime takes effect on the date of the wedding (art. 1,639, § 1º). In a stable union, partial community of property applies, unless the partners have a written contract (art. 1,725).

In intestate succession, the spouse competes with the descendants, unless married to the deceased under universal community of property or mandatory separation of property, or, under partial community, if the deceased left no separate property (art. 1,829, I). The spouse is a forced heir (art. 1,845), and half of the estate belongs to the forced heirs as the legítima (art. 1,846).

These limits weigh on a trust that tries to distribute the estate differently from what the law provides. A foreign trust that disregards the legítima may be challenged as to assets located in Brazil. Assess the design with a Brazilian lawyer.

Two conflict-of-law rules deserve attention:

• •The LINDB, art. 10, says that succession follows the law of the country where the deceased was domiciled, and that succession to the assets of foreigners located in Brazil is governed by Brazilian law for the benefit of the Brazilian spouse or children, when the personal law of the deceased is not more favorable to them.
• •The Code of Civil Procedure (CPC), art. 23, II, reserves to the Brazilian courts, excluding any other, the probate and division of assets located in Brazil, even if the deceased is a foreigner or domiciled outside the country.

The practical result: a couple with assets in both countries may have two probates, two laws and two taxes. See how to avoid probate with offshore structures and the succession planning service.

What steps should you follow to assess a QTIP?

1. •List the couple's assets by country and identify those located in the U.S.
2. •Confirm the citizenship and tax residence of each spouse.
3. •If the surviving spouse is not a U.S. citizen, assess the QDOT already when drafting the trust.
4. •Define the trustee and the law governing the trust, bearing in mind the U.S. trustee requirement in the QDOT.
5. •Examine the property regime and the legítima in Brazil with a Brazilian lawyer.
6. •Check the reporting of the trust's assets on the DAA and the Brazilian Capital Abroad report (CBE) with your accountant.
7. •Ask for the projection of U.S. tax and state ITCMD before signing.

If the goal is asset protection, and not only succession, compare with the DAPT and with other corporate structures.