In Private Letter Ruling 201345006 (released Nov. 8, 2013), the Internal Revenue Service determined that an election to treat assets of a marital trust as qualified terminable interest property (QTIP) wasn’t necessary to reduce the estate tax liability to zero because no estate tax would have been imposed on the assets, regardless of whether an election was made. Accordingly, the IRS disregarded the QTIP election with respect to the marital trust; treated it as null and void; and didn’t include it in a spouse’s gross estate under Internal Revenue Code Section 2044.
The Terms of the Trust
The decedent executed a will and established a revocable living trust. At the time of his death, the decedent was survived by his spouse and four children.
The trust provided that on the decedent’s death, the trust would terminate, and the trustee would distribute outright to the surviving spouse the largest amount that could pass free of federal estate tax (by reason of the unified credit and the state death tax credit allowable to the estate). After such distribution, the trustee was to place the remainder funds in a separate trust. During the spouse’s lifetime, she would receive annually all the net income of the trust, as well as principal that the trustee considers appropriate for the spouse’s comfort and welfare. On the spouse’s death, the remaining principal and accrued and undistributed income would be distributed to the four children, in equal shares. Should any child predecease a parent, that child’s issue would receive his share, per stirpes.
As per the trust’s terms, the spouse received a certain amount outright, and the remaining assets of the decedent’s gross estate, less exclusions, funded the marital trust. The decedent’s executor timely filed a Form 706 and on Schedule M, listed the assets of the marital trust, making a QTIP election as to those assets.
The estate asked the IRS to rule, pursuant to Revenue Procedure 2001-38, that the QTIP election made was null and void for purposes of IRC Sections 2044, 2056(b)(7), 2519(a) and 2652, because that the election wasn’t necessary to reduce the estate tax liability to zero. The IRS granted the estate’s request and made such a ruling.
IRC Analysis
Under Section 2056(b)(1), a marital deduction isn’t allowed for an interest passing to a surviving spouse that’s a “terminable interest.” A terminable interest is generally an interest passing to a spouse, which will cease or fail on the lapse of time or an occurrence of an event, and on such termination, passes to someone other than the surviving spouse. Under Section 2056(b)(7), there’s an exception to this rule: A QTIP is treated as passing to a surviving spouse, and no part of the property is treated as passing to any person other than the surviving spouse. QTIP property is property that passes from a decedent, in which a surviving spouse has a qualifying income interest for life, and to which an election applies. Under Section 2056(b)(7)(B)(v), once a QTIP election is made, it’s irrevocable. Any disposition of a qualifying income interest for life is treated as a transfer of all interests in property other than the qualifying interest (Section 2519(a)). And, Section 2652(a) provides that for property subject to a QTIP election, a surviving spouse will be treated as a transferor of the property for generation-skipping transfer (GST) tax purposes in the absence of a reverse QTIP election.
Rev. Proc. 2001-38 holds that a QTIP election will be treated as null and void when the election wasn’t necessary to reduce the estate tax liability to zero, based on values determined for federal estate tax purposes. In this instance, the election under Section 2056(b)(7) to treat the marital trust assets as QTIP wasn’t necessary to reduce the estate tax to zero because no estate tax would have been imposed on the marital trust assets—whether or not the election was made. That is, if the IRS granted relief under Rev. Proc. 2001-38, the estate’s federal estate tax would still be zero after applying the decedent’s unified credit amount. Thus, the IRS disregarded the QTIP election and treated it as null and void.
Accordingly, the property for which the QTIP election was disregarded isn’t includible in the spouse’s gross estate, and the spouse isn’t treated as making a gift under Section 2519 if she disposes of the income interest with respect to that property. Additionally, the IRS won’t treat the spouse as a transferor of the marital trust property for GST tax purposes under Section 2652.