Tax Law Update: July 2016

Tax Law Update: July 2016

• Internal Revenue Service rules that termination of marital trust won’t implicate Internal Revenue Code Section 2519 because initial qualified terminable interest property (QTIP) election was void, but release of power of appointment results in taxable gift—In Private Letter Ruling 201615004 (April 8, 2016), a surviving spouse entered into a settlement agreement with the children of a decedent in which they agreed to terminate a trust. The decedent’s revocable trust established the trust, and a QTIP election had been made for the trust on the decedent’s estate tax return. Under the settlement agreement: (1) the trust was to be terminated, and a fixed amount of the trust assets was to be paid to the spouse, (2) the trustee agreed to pay a percentage of the spouse’s income and gift tax liability, if any, caused by the termination of the trust, and (3) the remaining assets held in the trust were to be paid to other trusts for the benefit of the children.

The IRS ruled (at the estate’s request) that under Revenue Procedure 2001-38, the QTIP election was null and void because it wasn’t necessary to reduce the estate tax liability to zero. As a result, the trust property wasn’t includible in the spouse’s estate under IRC Section 2044, the spouse wasn’t treated as making a gift under IRC Section 2519 and the spouse wasn’t the transferor for generation-skipping transfer (GST) tax purposes under IRC Section 2652. In effect, the trust wasn’t a “marital trust.”

However, as part of the termination, the spouse did release a general power of appointment (GPA) over the trust. The IRS ruled that this release was a taxable transfer by the spouse under IRC Section 2514(b). The spouse was treated as making a gift of the value of the trust property at the time of the release, reduced by any consideration that the spouse received. Furthermore, by virtue of being treated as making a gift of the property due to the release of the GPA, the spouse was treated as the transferor for GST tax purposes (negating any GST allocation made by the decedent’s estate).

 

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