IRC 2044 mandates that the full fair market value of any QTIP trust property for which a marital deduction was previously allowed is included in the surviving spouse's gross estate at the second death. Under the OBBBA's permanent $15 million exemption, that mandatory inclusion now creates one of the most important basis step-up opportunities in the estate planning toolkit. This guide covers the IRC 2044 mechanics, the IRC 1014(b)(10) step-up decision, the IRC 2519 lifetime disposition trap, GST transferor consequences under IRC 2652, and the post-OBBBA planning analysis every practitioner must run for existing QTIP trusts.
The qualified terminable interest property (QTIP) trust is the principal vehicle through which a decedent's estate claims the federal estate tax marital deduction under IRC 2056(b)(7) while controlling the ultimate disposition of the trust remainder. The marital deduction is a deferral, not a forgiveness: the deferred estate tax is collected at the second death through the mandatory gross estate inclusion rule of IRC 2044.
Under IRC 2044(a), the surviving spouse's gross estate includes the full fair market value of all property for which a QTIP deduction was previously allowed. This rule applies whether the QTIP election was made on the decedent's Form 706 under IRC 2056(b)(7) for testamentary QTIP trusts, or on a Form 709 under IRC 2523(f) for lifetime gift QTIP arrangements. The inclusion is by operation of statute; it does not depend on what the trust document says, how the income interest is characterized, or whether the property is actually distributable to or through the surviving spouse at death.
The OBBBA (Public Law 119-21) permanently raised the individual applicable exclusion amount to $15 million per person, adjusted annually for inflation (verify the current indexed amount at IRS.gov before advising clients). That shift created a planning reversal for many surviving spouses: QTIP trusts that were structured to minimize second-death inclusion under a lower exemption may now sit entirely below the filing threshold, meaning the IRC 2044 inclusion occurs with zero estate tax cost and produces a full IRC 1014(b)(10) basis step-up on all appreciated QTIP trust assets. Identifying those estates and deciding whether to file Form 706 voluntarily to document the step-up is the defining planning question of 2026 for pre-OBBBA QTIP structures.
IRC 2044(a) provides that the value of the gross estate includes the value of any property to which this section applies in which the decedent had a qualifying income interest for life. The statute defines "property to which this section applies" as property for which a QTIP deduction was allowed under IRC 2056(b)(7) (estate QTIP) or IRC 2523(f) (gift QTIP). The surviving spouse does not need to hold any remainder interest, have any power over principal, or receive a distribution at death. The qualifying income interest in the trust, standing alone, is sufficient to require full fair market value inclusion of the entire trust corpus.
Key features of the IRC 2044(a) rule:
Amber Alert: IRC 2044 Applies to Gift QTIP Trusts Too
The inclusion rule applies to QTIP trusts funded by lifetime gifts under IRC 2523(f) as well as testamentary QTIP trusts under IRC 2056(b)(7). Practitioners must audit both estate and gift tax returns filed by the first spouse to identify all prior QTIP elections before finalizing the surviving spouse's gross estate. Missing a gift QTIP election is an underreported return risk.
IRC 2044(b) provides a limited deduction from the IRC 2044 inclusion. If the QTIP property passes from the surviving spouse's gross estate to a qualifying charitable organization, the portion passing to charity is deductible under the rules of IRC 2055. In practical terms, if the QTIP trust remainder passes to a qualified charity upon the surviving spouse's death, the executor may claim a charitable deduction under IRC 2055 on the surviving spouse's Form 706 for the value of the amount passing to the charitable remainder beneficiary. This coordination prevents double taxation on property that was included under IRC 2044 but ultimately inures to charity.
IRC 2044(c) cross-references IRC 2652(a)(1)(B), which provides that when QTIP property is included in the surviving spouse's gross estate under IRC 2044, the surviving spouse is treated as the transferor of that property for generation-skipping transfer tax purposes. The full GST analysis is covered in Section 5.
The QTIP property is valued at its fair market value on the date of the surviving spouse's death. IRC 2031 The executor may elect to use the alternate valuation date under IRC 2032 if (1) the election would decrease both the value of the gross estate and the net estate tax due. Because estates below the filing threshold typically owe no estate tax, the alternate valuation election is generally not available for below-threshold estates and cannot be used simply to set a higher step-up date. Practitioners should review the IRC 2032 election conditions carefully before advising clients to expect a stepped-up basis other than at date of death.
Illustrative Scenario
Spouse A dies in 2020 and leaves a QTIP trust funded with $4 million in appreciated real estate. The executor makes the IRC 2056(b)(7) QTIP election on Form 706. Spouse B (the surviving spouse) dies in 2026. At the time of B's death, the QTIP trust real estate is worth $9 million. Under IRC 2044(a), $9 million is included in B's gross estate at fair market value as of the date of B's death. Under IRC 1014(b)(10), the real estate receives a new cost basis of $9 million. If B's total estate (personal assets plus QTIP inclusion) is below the current indexed OBBBA exemption, the $9 million inclusion produces a full step-up with zero federal estate tax. The $5 million gain embedded in the QTIP trust is permanently eliminated for income tax purposes.
IRC 1014(a) establishes the general rule that property acquired from a decedent takes a cost basis equal to the fair market value of the property on the date of the decedent's death. IRC 1014(b)(10) extends this rule specifically to property includible in the gross estate under IRC 2044: such property is treated as "acquired from or to have passed from the decedent" for purposes of IRC 1014, meaning it qualifies for the date-of-death basis adjustment.
The step-up operates on the full fair market value of the QTIP trust assets at the surviving spouse's date of death, regardless of the assets' original cost basis when they were first placed into the QTIP trust. Appreciated securities, real property, and closely held business interests held in the QTIP trust all receive a fresh cost basis. Any unrealized gain that accrued both before and after the QTIP election is extinguished.
The IRC 1014(b)(10) step-up applies only to property that is actually included under IRC 2044. Property for which a QTIP election was made but which was subsequently removed from QTIP status through a settlement, reformation, or court order may not qualify. The step-up also applies even if the trust document gives the trustee discretion over distributions, provided the IRC 2044 inclusion requirement is met. Verify step-up eligibility at IRS.gov before relying on it.
The OBBBA permanently raised the applicable exclusion amount to $15 million per individual, adjusted for inflation (per IRC 2010 as amended by OBBBA (Public Law 119-21); verify the current-year indexed amount at IRS.gov). For married couples, the surviving spouse's estate may also use the portability DSUE from the first death, subject to the timely DSUE election under IRC 2010(c)(5). See Section 6.
The $15 million exemption reframes the IRC 2044 inclusion for a large subset of surviving spouses:
Executors of below-threshold estates are not required to file Form 706. However, voluntary filing is often the correct decision when the QTIP trust holds materially appreciated assets. The voluntary filing creates a contemporaneous record of the IRC 2044 inclusion and the IRC 1014(b)(10) basis adjustment, supports Form 8971 (Information Regarding Beneficiaries Acquiring Property From a Decedent) reporting obligations, and provides an audit trail if the IRS later questions the claimed basis. Planning strategy based on current law; verify with estate counsel before implementing.
Amber Alert: Voluntary Form 706 Filing
Run the capital gains savings analysis before deciding not to file. For a below-threshold estate, the IRC 1014(b)(10) step-up on QTIP trust assets may be worth far more than the filing cost, particularly where the trust holds appreciated real estate or closely held business interests. The voluntary filing cost is a one-time expense; the income tax savings flow to beneficiaries on every subsequent sale.
Amber Alert: OBBBA Exemption Indexed Annually
The permanent $15 million exemption adjusts for inflation each year under IRC 2010. Verify the current-year indexed amount at IRS.gov before determining estate tax exposure for any particular surviving spouse. Planning based on the nominal $15 million figure without indexing may understate the available exemption and lead to an overly conservative filing recommendation.
IRC 2519 is one of the most consequential and least understood traps in marital deduction planning. The statute provides that any disposition of all or part of a qualifying income interest in QTIP property is treated as a transfer of the entire remainder interest in the property by the surviving spouse, triggering gift tax on the full trust corpus at the time of disposition.
A "disposition" under IRC 2519 is not limited to an outright sale. It includes any voluntary or involuntary transfer of the income interest, an assignment of income distributions, pledging the income interest as collateral, and potentially certain terminations of the income interest. The statute does not require a bad-faith or tax-avoidance motive; the transfer alone triggers the rule.
Critical Warning: IRC 2519 Trap
Disposing of a QTIP income interest during the surviving spouse's lifetime, whether by sale, assignment, pledge, or any other transfer, triggers gift tax on the ENTIRE trust remainder under IRC 2519, not merely on the value of the income interest transferred. This is one of the most dangerous and irreversible traps in estate planning. Practitioners must warn every surviving spouse with a QTIP income interest: never sell, assign, pledge, disclaim, or transfer the income interest without specific advice of estate counsel. See the IRC 2056 Practitioner Guide for full mechanics of the QTIP income interest requirements.
An attempted disclaimer of the income interest after the surviving spouse has accepted any benefit from the QTIP trust (including receipt of any income distribution) is not a qualified disclaimer under IRC 2518 and is treated as a disposition under IRC 2519. The IRC 2519 gift of the remainder is also potentially subject to GST tax if the remainder beneficiaries are skip persons. For full IRC 2519 mechanics, including the interaction with IRC 2207A recovery rights, see the IRC 2056 guide.
The generation-skipping transfer tax treats IRC 2044 QTIP property as if the surviving spouse were the original transferor. Under IRC 2652(a)(1)(B), when property is includible in the surviving spouse's gross estate under IRC 2044, the surviving spouse is treated as the transferor of that property for GST purposes. This rule applies regardless of who originally funded the QTIP trust or whose estate made the QTIP election at the first death.
The GST consequence of IRC 2652(a)(1)(B) is that:
GST consequences are based on IRC 2652 and applicable Treasury regulations; verify current authority at IRS.gov.
The reverse QTIP election is an election made by the original decedent's executor under IRC 2652(a)(3) on a timely-filed Form 706 at the first death. When made, it overrides the default rule of IRC 2652(a)(1)(B) and treats the original decedent as the GST transferor for the QTIP trust, allowing the original decedent's GST exemption to be allocated to shelter the trust from GST tax on distributions to grandchildren after the surviving spouse's death.
Critical features of the reverse QTIP election:
Critical Warning: GST Transferor Identity
Before allocating any GST exemption from the surviving spouse's estate to the QTIP trust, practitioners must pull the original decedent's Form 706 and inspect Schedule R to determine whether a reverse QTIP election under IRC 2652(a)(3) was made. If the election was made, the original decedent remains the GST transferor; allocating the surviving spouse's exemption to the same trust is not only unnecessary but may result in a misallocation that wastes the surviving spouse's exemption on already-sheltered property. Failure to check for the reverse QTIP election produces inadvertent GST exposure at the second death and potential malpractice risk.
Surviving spouses holding interests in QTIP trusts that were structured before the OBBBA should have their full estate position recalculated as of today. The calculation must include: (1) the surviving spouse's own personal assets, (2) the current fair market value of all QTIP trust assets includible under IRC 2044, and (3) the value of any other gross estate inclusions such as life insurance, retained interests, and 401(k) or IRA assets with designated beneficiaries (which generally are not included in the gross estate but need to be understood for income tax planning purposes).
Where the total of items (1) and (2) falls below the current indexed OBBBA exemption, the QTIP trust is now a step-up opportunity rather than an estate tax problem. Practitioners should document this analysis in the client file and prepare a formal capital gains savings calculation that compares the estimated income tax savings from the IRC 1014(b)(10) step-up against the cost of a voluntary Form 706 filing.
If the original decedent's executor timely elected portability of the deceased spousal unused exclusion (DSUE) on Form 706 within the 5-year alternate deadline or on a timely-filed return, the surviving spouse may have a DSUE balance available to shelter additional estate assets beyond the surviving spouse's own $15 million exclusion. IRC 2010(c)(5)
Planning Note: Portability DSUE Coordination
The surviving spouse's estate may elect portability of the DSUE from the first spouse's estate under IRC 2010(c)(5), provided a timely election was made on the first spouse's Form 706. The DSUE adds to the surviving spouse's own $15 million exclusion amount and may further shelter assets even when the QTIP trust is substantial. Practitioners must confirm whether a timely portability election was made at the first death and calculate the current DSUE balance (which uses the first decedent's exclusion amount, not the surviving spouse's, and may be affected by any subsequent remarriage). Verify current portability rules and DSUE calculation methodology with estate counsel.
The filing decision for the surviving spouse's estate turns on three variables: the total gross estate including IRC 2044 QTIP inclusion, the current indexed exemption plus available DSUE, and the embedded capital gain in the QTIP trust assets. Practitioners should structure the analysis as follows:
| Issue | Rule / Analysis |
|---|---|
| Inclusion trigger (who/when) | The surviving spouse's gross estate includes QTIP property when the spouse dies holding a qualifying income interest in property for which a QTIP deduction was allowed under IRC 2056(b)(7) or IRC 2523(f). Inclusion is mandatory; no election required or permitted to opt out. |
| Amount included (full FMV vs. partial) | Full fair market value of the entire QTIP trust corpus at the date of the surviving spouse's death. Not limited to the actuarial value of the income interest. Partial inclusion is not available unless only a fraction of the trust was subject to a QTIP election. |
| Valuation date | Fair market value on the date of the surviving spouse's death under IRC 2031. The alternate valuation date under IRC 2032 may be elected only if it reduces both the gross estate value and the estate tax due; generally not available for below-threshold estates. |
| IRC 1014 basis treatment | Under IRC 1014(b)(10), QTIP property included under IRC 2044 receives a new cost basis equal to its fair market value at the date of the surviving spouse's death, wiping out all embedded capital gains. Verify at IRS.gov before relying on step-up eligibility. |
| Form 706 filing requirement vs. voluntary filing | A Form 706 is required only when the gross estate (including IRC 2044 QTIP property) exceeds the applicable filing threshold. Voluntary filing is often advisable for below-threshold estates to document the IRC 1014(b)(10) step-up basis and establish the audit trail required under Form 8971 reporting. |
| IRC 2044(b) charity deduction | If QTIP property included under IRC 2044 passes to a qualifying charitable organization upon the surviving spouse's death, an IRC 2055 charitable deduction is allowed on the surviving spouse's Form 706 for the value passing to charity, preventing double taxation on the charitable portion. |
| GST transferor identity | Under IRC 2652(a)(1)(B), the surviving spouse is the GST transferor for QTIP property included under IRC 2044. The surviving spouse's GST exemption applies to distributions to skip persons from the QTIP trust after the second death, unless a reverse QTIP election was made at the first death. |
| Reverse QTIP election availability | The IRC 2652(a)(3) reverse QTIP election may be made on the original decedent's timely-filed Form 706 to retain the original decedent as GST transferor. The election is irrevocable, all-or-nothing, and cannot be made after the Form 706 due date. Check the original Form 706, Schedule R, before allocating the surviving spouse's GST exemption. |
| OBBBA $15M exemption effect on planning | With the permanent $15 million individual exclusion (per IRC 2010 as amended by OBBBA, Public Law 119-21; verify current indexed amount at IRS.gov), many surviving spouses' estates, including QTIP FMV, fall below the threshold. In those cases, the IRC 2044 inclusion generates a full IRC 1014(b)(10) step-up with zero estate tax cost, making voluntary Form 706 filing a high-value election for estates with appreciated QTIP assets. |
| IRC 2519 lifetime disposition trap | Any disposition of the QTIP income interest during the surviving spouse's lifetime triggers gift tax on the entire trust remainder under IRC 2519, not merely on the income interest. This includes sales, assignments, pledges, and failed disclaimers. Practitioners must counsel surviving spouse clients against any transfer of the income interest without specific estate counsel review. |
| Portability DSUE interaction | If portability of the deceased spousal unused exclusion (DSUE) was timely elected on the first decedent's Form 706 under IRC 2010(c)(5), the surviving spouse's available exemption may significantly exceed the individual $15 million exclusion. The DSUE shelters additional estate assets and may further reduce or eliminate estate tax on the IRC 2044 inclusion even in larger estates. |
Q1: What property is included in the surviving spouse's estate under IRC 2044?
Under IRC 2044(a), the surviving spouse's gross estate includes the full fair market value of all property for which a QTIP election was previously allowed, whether under IRC 2056(b)(7) (testamentary QTIP from the decedent's estate) or IRC 2523(f) (lifetime gift QTIP funded by the first spouse during life). Inclusion is mandatory by operation of law regardless of whether the QTIP property actually passes to or through the surviving spouse. Practitioners must review all prior Form 706 and Form 709 returns to identify every prior QTIP election before preparing the surviving spouse's estate tax return. Verify current IRS authority at IRS.gov.
Q2: Does QTIP property get a step-up in basis at the surviving spouse's death?
Yes. Under IRC 1014(b)(10), property that is includible in the gross estate under IRC 2044 receives a new cost basis equal to its fair market value on the date of the surviving spouse's death (or the alternate valuation date, if properly elected). All embedded capital gains in the QTIP trust assets are extinguished. The step-up applies regardless of whether any estate tax is actually owed; it follows directly from the IRC 2044 inclusion. For estates below the OBBBA $15 million exemption threshold, this can mean a full step-up with zero federal estate tax cost. Verify step-up eligibility at IRS.gov before relying on it.
Q3: What is the OBBBA impact on QTIP trust planning in 2026?
The One Big Beautiful Budget Act (OBBBA, Public Law 119-21) permanently raised the individual applicable exclusion amount to $15 million per person, adjusted annually for inflation (verify the current indexed amount at IRS.gov). For a surviving spouse whose total gross estate, including QTIP trust value under IRC 2044, falls below the applicable exclusion amount, the IRC 2044 inclusion generates a full IRC 1014(b)(10) basis step-up on all QTIP trust assets with zero federal estate tax liability. This is the critical 2026 planning pivot for pre-OBBBA QTIP trusts: practitioners must recalculate every surviving client's projected estate, including current QTIP trust fair market value, against the current indexed exemption before advising. Planning strategy based on current law; verify with estate counsel before implementing.
Q4: Does the surviving spouse's estate have to file Form 706 to get the step-up?
No mandatory filing is required solely to obtain the IRC 1014(b)(10) step-up, but voluntary filing is often the correct decision. Under IRC 6018, Form 706 is required only when the gross estate exceeds the applicable filing threshold. Estates below the threshold are not required to file. However, voluntary filing creates a contemporaneous record of the IRC 2044 inclusion and the basis adjustment, supports Form 8971 reporting requirements, and provides an audit trail. Executors should run a capital gains savings analysis: if the QTIP trust holds appreciated assets and the heirs would face substantial capital gains taxes using carryover basis, the income tax savings from the step-up may far exceed the voluntary filing cost. Verify current Form 706 instructions and filing thresholds at IRS.gov before implementing.
Q5: What happens to GST tax when QTIP property is included under IRC 2044?
Under IRC 2652(a)(1)(B), when QTIP property is included in the surviving spouse's gross estate under IRC 2044, the surviving spouse (not the original decedent) is treated as the GST transferor for that property. This means that the surviving spouse's GST exemption, not the original decedent's, applies to distributions from the QTIP trust to grandchildren or lower-generation beneficiaries after the surviving spouse's death. Practitioners must identify the surviving spouse's remaining GST exemption and allocate it correctly on the surviving spouse's Form 706 to shelter intended distributions. Failure to allocate correctly can result in an unexpected 40% GST tax on trust distributions. Based on IRC 2652 and applicable Treasury regulations; verify current authority at IRS.gov.
Q6: What is the reverse QTIP election and why does it matter?
The reverse QTIP election is an election made under IRC 2652(a)(3) on the original decedent's Form 706 at the first death. When made, it treats the original decedent (rather than the surviving spouse) as the GST transferor for the QTIP trust, allowing the original decedent's GST exemption to shelter future distributions to grandchildren. The election is irrevocable, applies to the entire trust (not a fraction), and cannot be made after the Form 706 due date. Practitioners representing surviving spouses' estates must obtain the original decedent's Form 706 and inspect Schedule R before advising on GST exemption allocation. If a reverse QTIP election was made, no allocation of the surviving spouse's GST exemption is needed or appropriate for that trust. Verify current authority at IRS.gov.
Q7: What is IRC 2519 and how does it affect surviving spouses?
IRC 2519 is the lifetime disposition trap for surviving spouses holding a QTIP income interest. If the surviving spouse disposes of any part of the QTIP income interest during their lifetime, whether by sale, assignment, pledge, or any other form of transfer, IRC 2519 treats the surviving spouse as making a taxable gift of the entire remaining trust corpus (the remainder interest), not merely the income interest that was transferred. The gift tax consequences are immediate and may also trigger GST tax if the remainder beneficiaries are skip persons. Practitioners must counsel every surviving spouse with a QTIP income interest to never transfer, assign, pledge, or otherwise dispose of that interest without specific advice of estate counsel. For full IRC 2519 mechanics, see the IRC 2056 Practitioner Guide.
Q8: Can a surviving spouse disclaim a QTIP income interest?
A timely qualified disclaimer under IRC 2518 is possible if made before the surviving spouse has accepted any benefit from the QTIP income interest, including any income distribution. A qualified disclaimer that meets all IRC 2518 requirements removes the disclaimed interest from the surviving spouse's estate without gift tax consequences. However, once the surviving spouse has received any income distribution or otherwise accepted a benefit from the trust, the disclaimer window closes. Any subsequent attempt to disclaim or transfer the income interest will not qualify under IRC 2518 and will be treated as a disposition triggering IRC 2519, causing immediate gift tax on the entire trust remainder. Given that most QTIP trusts begin distributing income promptly after the first death, the practical window for a valid disclaimer is narrow and must be analyzed with counsel immediately after the first death, before any distributions are received. Verify current disclaimer requirements with estate counsel before advising any client to disclaim.
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