PLR 200548017: Estate receives 60 days to make reverse QTIP election

Plain-English summary

An estate elected qualified terminable interest property treatment for a marital trust but omitted the separate reverse QTIP election for generation-skipping transfer tax purposes. The omission came to light while preparing the surviving spouse's estate tax return. The IRS granted 60 days from the ruling date to make the reverse QTIP election on a supplemental estate tax return. The estate had not asked for more time to allocate its generation-skipping tax exemption, so the IRS said the available exemption would be allocated under the automatic allocation rule if the election was made. The ruling gave more time for the election itself; it did not grant separate allocation relief.

Ruling snapshot

• Question: Could the estate make a late reverse QTIP election for its marital trust?
• Outcome: Approved: 60 days to make the election on a supplemental Form 706.
• Key authorities: IRC §§ 2056(b)(7), 2632(e)(1), 2652(a)(3); Treas. Reg. §§ 26.2652-2, 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200548017
Third Party Communication: None
Release Date: 12/2/2005
Date of Communication: Not Applicable
Index Number: 2652.01-02, 9100.00-00
Person To Contact:
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------------------, ID No. -------------
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Telephone Number:
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Refer Reply To:
CC:PSI:B04
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PLR-144225-04
Date: August 22, 2005

Re: -------------------------------

Legend

Decedent = ------------------------------------
Spouse = ---------------------------------------
Marital Trust = ---------------------------------------------------------- Bypass Trust = ------------------------------------------------------------ Amount 1 = ------------ Amount 2 = ------------ Date 1 = ------------------ Date 2 = -----------------

Dear ------------:

This is in response to a letter dated June 22, 2004, requesting a ruling for an extension of time under §' 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make a “reverse” qualified terminable interest property (“QTIP”) election under § 2652(a)(3) of the Internal Revenue Code.

Facts

The facts submitted and representations made are as follows. Decedent died on Date 1, survived by Spouse. Pursuant to the terms of a revocable inter vivos trust created by Decedent and Spouse, on Decedent’s death, a Bypass Trust was funded with Amount 1 and a Marital Trust was funded with Amount 2. On the Schedule M of Decedent=s Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, the executor elected to treat the Marital Trust as QTIP under § 2056(b)(7). No Schedule R was filed with Decedent’s Form 706 and Amount 1 of Decedent’s generation-skipping transfer (GST) exemption was automatically allocated to the
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Bypass Trust. No reverse QTIP election under ' 2652(a)(3) was made with respect to the Marital Trust.

Spouse died on Date 2. In preparing Spouse’s Form 706, the failure to make the reverse QTIP election on Decedent’s Form 706 was discovered. You request an extension of time under §§ 301.9100-1 and 301.9100-3 within which to make the reverse QTIP election under § 2652(a)(3) with respect to the Marital Trust.

Law and Analysis

Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States.

Section 2056(a) provides that, for purposes of the tax imposed by § 2001, the value of the taxable estate shall, except as limited by § 2056(b), be 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, but only to the extent that such interest is included in determining the value of the gross estate.

Section 2056(b)(1) disallows this deduction where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail.

Section 2056(b)(7)(A) provides that, in the case of qualified terminable interest property, for purposes of § 2056(a), such property shall be treated as passing to the surviving spouse, and for purposes of § 2056(b)(1)(A), no part of such property shall be treated as passing to any person other than the surviving spouse.

Section 2056(b)(7)(B)(i) defines the term "qualified terminable interest property" as property: (I) which passes from the decedent; (II) in which the surviving spouse has a qualifying income interest for life; and (III) to which an election under § 2056(b)(7) applies.

Section 2056(b)(7)(B)(ii) provides that the surviving spouse has a qualifying income interest for life if: (I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct interest for life in the property; and (II) no person has a power to appoint any part of the property to any person other than the surviving spouse.

Section 2056(b)(7)(B)(v) provides that an election under § 2056(b)(7) with respect to any property shall be made by the executor on the return of tax imposed by § 2001. Such an election, once made, shall be irrevocable.
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Section 2601 imposes a tax on every generation-skipping transfer (within the meaning of subchapter B). A “generation-skipping transfer” is defined under § 2611(a) as: (1) a taxable distribution; (2) a taxable termination; and (3) a direct skip.

Section 2602 provides that the amount of the GST tax is determined by multiplying the taxable amount by the applicable rate. Section 2641(a) provides that the term "applicable rate" means with respect to any GST transfer, the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer. Under ' 2642(a)(1), the inclusion ratio with any property transferred in a generation- skipping transfer is generally defined as the excess of 1 over the "applicable fraction." The applicable fraction, as defined in § 2642(a)(2) is a fraction, the numerator of which is the amount of GST exemption under § 2631 allocated to the trust (or to property transferred in a direct skip), and the denominator is the value of the property transferred reduced by the sum of any federal estate tax or state death tax actually recovered from the trust attributable to such property and any charitable deduction allowable under ' 2055 or ' 2522 with respect to such property.

Section 2631(a), as in effect for decedents dying before December 31, 2003, provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption of $1,000,000 (adjusted for inflation under § 2631(c)) which may be allocated by such individual (or his executor) to any property with respect to which such individual is the transferor. Section 2631(b) provides that any allocation under § 2631(a), once made, shall be irrevocable.

Section 2632(a) provides that any allocation by an individual of his or her GST exemption under § 2631(a) may be made at any time on or before the date prescribed for filing the estate tax return for such individual's estate (determined with regard to extensions), regardless of whether such a return is required to be filed. Section 2632(e)(1) provides that, in general, any portion of an individual's GST exemption which has not been allocated within the time prescribed by § 2632(a) shall be deemed to be allocated as follows: (A) first, to property which is the subject of a direct skip occurring at such individual's death, and (B) second, to trusts with respect to which such individual is the transferor and from which a taxable distribution or a taxable termination might occur at or after such individual's death.

Section 2652(a)(1) provides that for purpose of chapter 13, the term “transferor” means: (A) in the case of any property subject to the tax imposed by chapter 11, the decedent; and (B) in the case of any property subject to the tax imposed by chapter 12, the donor. An individual shall be treated as transferring any property with respect to which such individual is the transferor.

Section 2652(a)(3) provides, in pertinent part, that in the case of any trust with respect to which a deduction is allowed to the decedent under § 2056(b)(7), the estate of the decedent may elect to treat all of the property in such trust for GST tax purposes
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as if the election to be treated as qualified terminable interest property had not been made (reverse QTIP election).

Section 26.2652-2(a) of the Generation-Skipping Transfer Tax Regulations provides, in part, that a reverse QTIP election is not effective unless it is made with respect to all of the property in the trust to which the QTIP election applies. Section 26.2652-2(b) provides that an election under § 2652(a)(3) is made on the return on which the QTIP election is made.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a reasonable extension of time under the rules set forth in '' 301.9100-2 and 301.9100-3 to make a regulatory election, or a statutory election (but no more than 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue Code except subtitles E, G, H, and I.

Section 301.9100-3 provides the standards used to determine whether to grant an extension of time to make an election whose due date is prescribed by a regulation (and not expressly provided by statute).

Requests for relief under ' 301.9100-3 will be granted when the taxpayer provides the evidence to establish to the satisfaction of the Commissioner that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government.

Section 301.9100-3(b)(1)(v) provides that a taxpayer is deemed to have acted reasonably and in good faith if the taxpayer reasonably relied on a qualified tax professional, including a tax professional employed by the taxpayer, and the tax professional failed to make, or advise the taxpayer to make, the election.

Based on the facts and representations made, we have determined that the standards of '' 301.9100-1 and 301.9100-3 have been met. Therefore, we rule that an extension of time to make a “reverse” QTIP election with respect to the Marital Trust is granted until 60 days from the date of this letter. The taxpayer has not requested an extension of time to allocate the GST exemption. Accordingly, if the reverse QTIP election is made pursuant to the relief granted in this letter ruling, the Decedent’s available GST exemption will be allocated to the Marital Trust and the Bypass Trust in accordance with § 2632(e)(1).

The reverse QTIP election should be made on a supplemental Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return filed with the Internal Revenue Service Center, Cincinnati, OH 45999. A copy of this letter should be attached.
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Except as specifically ruled herein, we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the Code.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Sincerely,

Heather C. Maloy
Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosure
Copy of this letter for § 6110

cc: