A California QTIP trust is an irrevocable marital trust that pays all of its income to a surviving spouse for life, then passes the remaining principal to beneficiaries the first spouse chose, usually children from a prior marriage. QTIP stands for “qualified terminable interest property,” and the structure qualifies for the federal estate tax marital deduction so no estate tax is owed when the first spouse dies. It is the standard planning tool for California couples who want to provide for the surviving spouse without letting that spouse redirect assets after they are gone.
How the Trust Works
Three roles drive the trust. The grantor is the spouse who creates and funds it, typically through an estate plan that takes effect at death. The surviving spouse is the income beneficiary, legally entitled to every dollar of net income the trust generates for the rest of their life. The remainder beneficiaries are the people the grantor named to inherit what is left after the surviving spouse dies.
The “terminable interest” label describes what the surviving spouse actually gets: a right to income that terminates at their death. The surviving spouse never owns the principal and cannot change who inherits it. That decision belongs to the grantor, and once the grantor dies, it is locked. In blended families this is usually the whole point. The first spouse to die wants the survivor supported but wants their own children, not a future partner or stepfamily, to receive the assets at the end.
What the Surviving Spouse Can and Cannot Do
The surviving spouse’s right to income is unconditional. It is not up to the trustee’s discretion, and it is a requirement for the trust to qualify as a QTIP. Income has to be paid out at least once a year and can come from interest, dividends, rent, or any other earnings the trust assets throw off.
Principal is a different matter. Most QTIP trusts limit principal distributions to amounts needed for the surviving spouse’s health, education, maintenance, and support, a formula estate planners call the HEMS standard. The trustee decides whether a request fits that standard. The surviving spouse cannot demand principal on their own, cannot pledge trust assets as collateral, cannot gift trust property, and cannot override the remainder beneficiaries.
That limited control carries a benefit. Assets inside the trust are generally shielded from the surviving spouse’s personal creditors and from claims in a later divorce. Once money is actually distributed to the spouse, the protection ends for whatever leaves the trust.
Qualifying for the Marital Deduction
The federal estate tax marital deduction is not automatic. The executor of the deceased spouse’s estate has to affirmatively elect QTIP treatment on the federal estate tax return, Form 706. Once made, the election is irrevocable.
Form 706 is due nine months after the date of death. The estate can request an automatic six-month extension by filing Form 4768 before that original deadline, which pushes the outer limit to fifteen months. Miss the window and the QTIP election is gone. For an estate large enough to owe federal tax, that mistake can create the exact bill the plan was built to avoid.
For 2026, the federal basic exclusion amount is $15,000,000 per person, so a married couple with coordinated planning can shelter up to $30,000,000 combined. Estates below those thresholds owe no federal estate tax whether or not a QTIP trust is used. The trust still does real work at lower wealth levels, because its non-tax features (controlling the remainder, protecting the surviving spouse from creditors, and preserving assets for specific heirs) do not depend on being over the exemption.
Why California Changes the Math
California has no state-level estate or inheritance tax. The old state estate tax was tied to a federal credit that was eliminated in 2005. Only federal estate tax applies, which keeps the planning simpler than it would be in states that layer their own tax on top.
The bigger California-specific advantage is community property. Under federal tax law, when the first spouse dies, both halves of community property receive a stepped-up basis, not just the deceased spouse’s half. In separate property states, only the deceased spouse’s share gets the new basis.
Put community property into a QTIP trust and a second step-up happens at the surviving spouse’s death, because the trust assets are included in that spouse’s gross estate. The result is two basis resets on the same assets. For California couples holding long-held real estate or appreciated portfolios, this double step-up can wipe out decades of built-in capital gains for the children who ultimately inherit. Correctly characterizing assets as community versus separate property before funding the trust matters a lot. Mislabeling can forfeit the first step-up.
What Happens at the Second Death
The trust ends when the surviving spouse dies. The trustee distributes the remaining principal to the remainder beneficiaries the grantor originally selected. The surviving spouse’s will has no effect on where any of it goes.
The tax trade-off for deferring estate tax at the first death is that the full value of the QTIP trust is pulled into the surviving spouse’s taxable estate. The IRS allowed the deferral; it collects at the second death instead.
Along with that inclusion comes the basis step-up. If the trust holds stock the grantor bought for $100,000 that is worth $1,000,000 when the surviving spouse dies, the remainder beneficiaries take it with a $1,000,000 basis. They owe no capital gains tax on the appreciation that built up during both spouses’ lifetimes.
QTIP Trust vs. Portability
Portability is the simpler option. When the first spouse dies, the executor files Form 706 to transfer any unused federal exemption to the surviving spouse. For 2026, that is up to $15,000,000 of unused exemption passing to the survivor, who can then shelter up to $30,000,000 combined. No trust required.
Portability is a reasonable fit for first marriages with straightforward plans. It has limits that make the QTIP trust the better tool in several common situations:
- Portability only raises the surviving spouse’s exemption. The surviving spouse can still leave everything to a new partner. A QTIP trust fixes the remainder beneficiaries at the first death.
- Assets a surviving spouse inherits outright are exposed to lawsuits, creditors, and divorce claims. QTIP assets are generally shielded.
- The generation-skipping transfer tax exemption cannot be ported. If the first spouse wants to benefit grandchildren tax-efficiently, that exemption has to be allocated to a trust at death or it is permanently lost. A QTIP with a reverse QTIP election preserves it.
- The ported exemption is frozen at the amount it held when the first spouse died. It does not adjust for inflation, so a long-lived survivor loses purchasing power over time.
- If the surviving spouse remarries and the new spouse later dies, only the most recent deceased spouse’s unused exclusion counts. The original ported amount is replaced.
For blended families, and for couples holding assets likely to appreciate significantly, the QTIP trust is usually the stronger choice. Portability solves the tax problem but leaves control, protection, and generational planning on the table.
Tax Traps Worth Knowing
Three mistakes cause most of the damage with QTIP trusts.
Disposing of the Income Interest
If the surviving spouse gives away, sells, or otherwise disposes of their income interest, federal tax law treats it as a transfer of the entire trust, not just the income stream. The surviving spouse is deemed to have made a taxable gift equal to the full value of the trust principal minus the value of the income interest given up. Even a partial disposition triggers the rule for the entire trust. The result can be an enormous gift tax bill on assets the surviving spouse never actually owned or controlled.
Missing or Botching the QTIP Election
The QTIP election is time-sensitive and all-or-nothing. If the executor files Form 706 without making the election, it generally cannot be added later by amended return after the due date. An estate that misses the election loses the marital deduction on those assets, which can create tax at the first death that the whole plan was built to avoid.
Funding With the Wrong Assets
The trust has to produce income for the surviving spouse. Assets that generate little or none (raw land, non-dividend growth stock, collectibles) can cause the trust to fail its qualifying income interest requirement if the trustee does nothing about it. The trust instrument should give the trustee authority to convert non-productive assets to income-generating ones, or to make equitable adjustments between income and principal.
Choosing a Trustee
California’s Probate Code requires the trustee to act solely in the beneficiaries’ interest and to treat beneficiaries with different interests impartially. In a QTIP trust that balancing act is constant. The surviving spouse wants maximum income. The remainder beneficiaries want the principal preserved and growing. The trustee has to split the difference fairly, following the trust document first and the Probate Code where the document is silent.
A family member understands the people involved but may not have investment expertise. A professional trustee, such as a bank trust department or a corporate fiduciary, brings expertise and neutrality and charges roughly 0.5% to 1% of trust assets annually. On a $2,000,000 trust that is $10,000 to $20,000 a year. Many families appoint an individual as co-trustee alongside a professional to pair personal judgment with institutional accountability.