A California QTIP trust is an irrevocable marital trust that gives your surviving spouse a lifetime right to the trust’s income while you decide, permanently, who inherits the principal after that spouse dies. It qualifies for the federal estate tax marital deduction, so assets placed in it aren’t taxed at the first death. The tool is most often used in blended families, where one spouse wants to support the other for life without letting the assets end up with a new partner or the wrong branch of the family.
QTIP stands for qualified terminable interest property. The “terminable” part is the key: the surviving spouse’s interest ends at their death, and the assets then pass to remainder beneficiaries the original grantor named, not anyone the surviving spouse chose.
How a California QTIP Trust Works
Three roles run the trust. The grantor is the spouse who creates and funds it, usually through an estate plan that takes effect at death. The surviving spouse is the income beneficiary, entitled to every dollar of income the trust produces for life. The remainder beneficiaries are the people the grantor chose to inherit whatever principal is left when the surviving spouse dies. In second marriages, those remainder beneficiaries are commonly the grantor’s children from a prior relationship.
The surviving spouse never owns the trust principal. They cannot redirect it, cannot rewrite the remainder beneficiaries in their own will, and cannot pledge trust assets as collateral for personal debts. That restriction is the whole point of the structure.
What the Surviving Spouse Can and Can’t Do
The surviving spouse has an unconditional right to all net income the trust generates, paid at least once a year. That income might come from interest, dividends, rents, or other earnings on the trust’s holdings. This right isn’t discretionary; it’s a federal condition for the trust to qualify.
Principal is different. Most QTIP trusts limit principal distributions to what the surviving spouse needs for health, education, maintenance, and support, a standard estate planners call HEMS. Any principal payment is at the trustee’s discretion, not on the spouse’s demand. That limited access is also what generally shields trust assets from the surviving spouse’s personal creditors, though the protection ends once money is actually distributed.
What Happens When the Surviving Spouse Dies
The trust terminates. The trustee distributes what remains to the remainder beneficiaries the grantor originally named. The surviving spouse’s will has no say in the matter.
The tax trade-off for deferring estate tax at the first death is that the full value of the QTIP trust is included in the surviving spouse’s taxable estate. The IRS allowed the deferral, so it collects at the second death instead.
Because the assets are included in that estate, they get a new cost basis equal to fair market value at the surviving spouse’s death. If the trust was funded with stock originally worth $100,000 that grew to $1,000,000, the beneficiaries’ basis resets to $1,000,000, and they owe no capital gains tax on the appreciation when they sell.
Why California Matters
California has no state estate tax or inheritance tax. The state’s estate tax was tied to the federal state death tax credit, which was eliminated in 2005. Only federal estate tax applies, which keeps QTIP planning simpler here than in states with their own death tax.
The Community Property Double Step-Up
California is a community property state, and that produces a significant tax advantage. Under federal law, when the first spouse dies, the entire value of community property receives a stepped-up basis, both halves, not just the deceased spouse’s share. Separate property states only step up the deceased spouse’s half.
When that community property is then funded into a QTIP trust, a second step-up happens at the surviving spouse’s death because the trust is included in that spouse’s gross estate. Two basis resets on the same assets. For California couples holding appreciated real estate or long-held investment portfolios, this can erase decades of built-in capital gains.
Correct characterization of assets as community versus separate property matters a great deal when funding the trust. Getting that classification wrong can forfeit the first step-up entirely.
QTIP Trust or Portability
Portability is the simpler alternative. When the first spouse dies, the executor can file Form 706 to transfer any unused federal estate tax exclusion to the surviving spouse. For 2026, the basic exclusion is $15,000,000 per person, so a couple can shelter up to $30,000,000 combined without a trust.
Portability works for first-marriage couples with straightforward plans. A QTIP trust does more in several situations portability can’t reach:
- Portability just raises the surviving spouse’s exemption. The surviving spouse can still leave assets to anyone, including a new partner. A QTIP trust locks in the remainder beneficiaries at the first death.
- Assets inherited outright are exposed to lawsuits, creditors, and divorce claims. QTIP trust assets are generally protected.
- The generation-skipping transfer tax exemption is not portable. If planning for grandchildren matters, the exemption must be allocated to a trust at the first death or it’s permanently lost. A QTIP trust with a “reverse QTIP” election preserves that option.
- The ported exemption is frozen at its value when the first spouse died and does not adjust for inflation.
- If the surviving spouse remarries and the new spouse later dies, the ported exemption is replaced. Only the last deceased spouse’s unused exclusion counts.
For blended families, or for couples whose assets are likely to appreciate meaningfully, a QTIP trust is usually the stronger choice. Portability solves only the tax problem.
The Election Deadline
The marital deduction on a QTIP trust is not automatic. The executor of the first spouse’s estate must affirmatively elect QTIP treatment on Form 706, the federal estate tax return. That election is irrevocable once made.
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 the original deadline, pushing the outer limit to fifteen months. Miss that window and the QTIP election is gone. An executor who files the return without making the election generally cannot fix it later with an amended return. This is one of the most consequential clerical deadlines in estate planning.
Tax Traps Worth Knowing
Giving Up the Income Interest
If the surviving spouse gives away, sells, or otherwise disposes of their income interest, federal law treats it as a transfer of the entire trust, not just the income. The IRS considers the spouse to have made a taxable gift equal to the full principal minus the value of the income interest given up. Even a partial disposition triggers the rule for the whole trust. This can create a large gift tax bill on assets the surviving spouse never owned.
Funding With the Wrong Assets
The trust has to generate income for the surviving spouse, so assets that produce little or none (raw land, non-dividend growth stock, collectibles) can undermine the trust’s qualification if nothing is done about them. The trust instrument should give the trustee authority to convert unproductive assets into income-producing ones, or to make equitable adjustments between income and principal.
Missing the Election
See the deadline section above. An estate that files Form 706 without electing QTIP treatment loses the marital deduction on those assets, which can produce a tax bill at the first death that the entire plan was designed to avoid.
Choosing a Trustee
A QTIP trustee has to balance two competing interests: the surviving spouse wants maximum income, while the remainder beneficiaries want principal preserved and growing. California’s Probate Code requires the trustee to act impartially between them and to follow the trust instrument first, with the Probate Code filling gaps (including rules on classifying receipts as income or principal).
A family member trustee may understand the family but lack investment expertise. A professional trustee, such as a bank trust department or corporate fiduciary, brings expertise and neutrality but charges annual fees commonly ranging from about 0.5% to 1% of trust assets. On a $2,000,000 trust, that’s $10,000 to $20,000 a year. Many families use a trusted individual as co-trustee alongside a professional to combine personal judgment with institutional accountability.
When a QTIP Trust Makes Sense
If you’re in a second marriage with children from a prior relationship, if you hold appreciated California community property, if you want to protect a surviving spouse’s inheritance from future creditors or a future partner, or if you want to preserve generation-skipping planning for grandchildren, a QTIP trust does work portability cannot. If your situation is simpler and your combined estate is comfortably below the federal exemption, portability may be all you need, though it won’t give you control over where the assets go after your spouse.