Terminable Interest Law and Legal Definition

A terminable interest is an interest in property that will end upon the occurence of a certain event or contingency, after a certain time period, or on the failure of an event or condition to occur. It is typically used in reference to property that is disqualified for a marital deduction for estate and gift tax purposes.

Generally, a lifetime transfer of property between a husband and a wife is not subject to gift tax because of the unlimited gift tax marital deduction. When a husband or wife transfers a "terminable interest" in property to his or her spouse, however, the transfer will not qualify for the marital deduction, except in limited circumstances. The well-known exceptions to the "terminable interest" rule include both qualified terminable interest property ("QTIP") trusts and general power of appointment marital trusts, both of which qualify for the gift tax marital deduction.

Another exception to the terminable interest rule applies if the person receiving the remainder of a terminable interest paid full and adequate consideration for that remainder interest.