PLR 200236021: Unnecessary QTIP election for credit shelter trust disregarded

Plain-English summary

An estate made QTIP elections for both a marital trust and a credit shelter trust that benefited the surviving spouse. The credit shelter trust election did not reduce the estate tax because the trust could pass free of tax without it. The IRS ruled that the unnecessary election would be disregarded under Revenue Procedure 2001-38. The credit shelter trust property therefore would not enter the surviving spouse's estate under section 2044, and disposing of the income interest would not trigger the gift treatment in section 2519. The spouse also would not be treated as the transferor of that trust property for generation-skipping transfer tax purposes under section 2652.

Ruling snapshot

• Question: Will the IRS disregard an unnecessary QTIP election for the credit shelter trust?
• Outcome: Approved: the election is treated as null and void for the specified tax provisions
• Key authorities: IRC §§ 2044(a), 2056(b)(7), 2519(a), and 2652(a); Treas. Reg. § 20.2056(b)-7(b)(4)(i); Rev. Proc. 2001-38

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200236021
Washington, DC 20224
Release Date: 9/6/2002
Index Number: 2056.00-00; 2044.00-00;
Person to Contact:
2519.00-00; 2652.00-00
Telephone Number:

Refer Reply To:
CC:PSI:B04-PLR-122174-02
Date:
June 03, 2002

Re:

LEGEND:

Decedent =
Spouse =
Will =
Date 1 =
Date 2 =

Dear
:

This letter is in response to your letter, dated April 15, 2002, requesting a ruling, pursuant to the authority of Revenue Procedure 2001-38, 2001-24 I.R.B. 1335, that the qualified terminable interest property (QTIP) election which was made in respect of the credit shelter trust established under Paragraph Sixth of Will, be treated as a nullity for purposes of sections 2044(a), 2056(b)(7), 2519(a), and 2652 of the Internal Revenue Code.

FACTS:

Decedent died on Date 1. Pursuant to Paragraph Sixth of Will, the executors of Decedent’s estate funded a credit shelter trust for the lifetime benefit of Spouse in an amount equal to that fraction of the residuary estate of which the numerator equaled the largest amount that could pass free of federal estate tax by reason of the unified credit and state death tax credit, and the denominator was the value of the residuary estate. Pursuant to Paragraph Seventh of Will, the balance of the residuary estate passed to a marital trust for the lifetime benefit of Spouse. The marital trust was intended to qualify as a qualified terminable interest property (QTIP) trust.

Decedent’s federal estate tax return (Form 706) was filed on or about Date 2.
On Schedule M of the return, the executors made QTIP elections for both the credit shelter trust and the marital trust. The QTIP election for the credit shelter trust was unnecessary, because no estate tax would have been imposed whether or not the QTIP election was made for that trust.

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PLR-122174-02

LAW AND ANALYSIS:

Section 2056(a) provides that, except as limited by section 2056(b), the value of a taxable estate is determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to the surviving spouse. Section 2056(b)(1) denies a marital deduction for an interest passing to the surviving spouse that is a "terminable interest." An interest is a terminable interest if the interest passing to the surviving spouse will terminate or fail on the lapse of time or on the occurrence of an event or contingency or on the failure of an event or contingency to occur, and on termination, an interest in the property passes to someone other than the surviving spouse.

Section 2056(b)(7)(A) provides an exception to this terminable interest rule in the case of qualified terminable interest property. For purposes of section 2056(a), qualified terminable interest property is treated as passing to the surviving spouse, and no part of the property is treated as passing to any person other than the surviving spouse. Under section 2056(b)(7)(B)(i), qualified terminable interest property is property which passes from the decedent, in which the surviving spouse has a qualifying income interest for life, and to which an election under section 2056(b)(7)(B)(v) applies.

Section 2056(b)(7)(B)(v) provides that the election to treat property as QTIP under section 2056(b)(7) is made by the executor on the return of tax imposed by section 2001. This election, once made, is irrevocable.

Section 20.2056(b)-7(b)(4)(i) of the Estate Tax Regulations provides that the QTIP election is made on the return of tax imposed by section 2001 (or section 2101). The term "return of tax imposed by section 2001" means the last estate tax return ((Form 706-United States Estate (and Generation-Skipping Transfer) Tax Return)) filed by the executor on or before the due date of the return, including extensions or, if a timely return is not filed, the first estate tax return filed after the due date.

Section 2044(a) and (b) provides generally that the value of the gross estate includes the value of any property in which the decedent had a qualifying income interest for life and with respect to which a deduction was allowed for the transfer of the property to the decedent under section 2056(b)(7).

Section 2519(a) and (b) provide that any disposition of all or part of a qualifying income interest for life in any property with respect to which a deduction was allowed under section 2056(b)(7) is treated as a transfer of all interests in the property other than the qualifying income interest.

Section 2652(a) provides that the surviving spouse will be treated as the transferor of the property for generation-skipping transfer tax purposes in the absence of a “reverse QTIP” election under section 2652(a)(3).

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PLR-122174-02

Revenue Procedure 2001-38 provides relief for surviving spouses and their estates in situations where a predeceased spouse’s estate made an unnecessary qualified terminable interest property (QTIP) election under section 2056(b)(7) that did not reduce the estate tax liability of the estate. When such an unnecessary election is made, the Internal Revenue Service will disregard the election and treat it as null and void for purposes of sections 2044(a), 2056(b)(7), 2519(a), and 2652. The revenue procedure specifically applies to cases where an estate made QTIP elections for both a credit shelter trust and a marital trust, and the QTIP election for the credit shelter trust was not necessary, because no estate tax would have been imposed whether or not the QTIP election was made for that trust.

In this case, the QTIP election for the credit shelter trust was unnecessary because no estate tax would have been imposed whether or not the election was made for the trust. Accordingly, we rule that the Service will disregard the QTIP election for the credit shelter trust established under Paragraph Sixth of Will and treat it as null and void for purposes of sections 2044(a), 2056(b)(7), 2519(a) and 2652. The property in the credit shelter trust for which the election is disregarded will not be includible in the gross estate of Spouse under section 2044, and Spouse will not be treated as making a gift under section 2519 if Spouse disposes of the income interest with respect to that property. Further, Spouse will not be treated as the transferor of the property in the credit shelter trust for generation-skipping transfer tax purposes under section 2652(a).

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter. This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representative. A copy of this letter must be attached to any tax return to which it is relevant. The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

Sincerely,
Lorraine E. Gardner
Assistant to the Branch Chief. Branch 4
Office of Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosure (1)
Copy for section 6110 purposes