PLR 1024035: IRS treated unnecessary QTIP elections as null and void

Plain-English summary

The estate asked whether QTIP elections covering jointly owned property and property placed in a family trust could be treated as null and void. The IRS ruled that both elections were unnecessary because the jointly owned property already qualified for the marital deduction and the estate tax would have been zero without the election for the family trust. As a result, the property would not be included in the surviving spouse's gross estate under § 2044, and the spouse would not be treated as making a gift under § 2519 or as the transferor for generation-skipping transfer tax purposes under § 2652. The ruling matters because it removes the later tax consequences that otherwise can follow from an unnecessary QTIP election.

Ruling snapshot

• Question: Can QTIP elections for jointly owned property and a family trust be treated as null and void when they were not needed to reduce estate tax to zero?
• Outcome: Approved
• Key authorities: IRC §§ 2001, 2040, 2044, 2056, 2519, and 2652; Rev. Proc. 2001-38

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201024035 Third Party Communication: None
Release Date: 6/18/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 2056.01-00 ---------------, ID No. -------------
Telephone Number:
---------------------
------------------------------------------------------ Refer Reply To:
----------------------------- CC:PSI:04
--------------------------------- PLR-147519-09
Date:
RE: January 20, 2010
-------------------------------------

Legend

Decedent = ---------------------------------------------------
Spouse = ----------------------
Date 1 = -------------------------
y = -----------
z = --------------

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

      This responds to your authorized representative’s letter dated October 2, 2009,

requesting a ruling that, pursuant to Rev. Proc. 2001-38, 2001-2 C.B. 124, the qualified
terminable interest property (QTIP) election made with respect to Decedent's estate is a
nullity for federal estate, gift and generation-skipping transfer tax purposes.

      The facts submitted and representations made are as follows:

     Decedent died on Date 1, survived by Spouse. Pursuant to Article Three of

Decedent's Last Will and Testament, upon Decedent's death, all of Decedent’s property,
both real and personal, was to be divided into two separate shares, the “Marital
Deduction Share” and the “Family Share”. Pursuant to Article Three, Section C,
paragraph 1, the Marital Deduction Share is to be the “smallest fractional share of
[Decedent’s] residuary estate that qualifies for the Federal estate tax deduction… .”
Article Three, Section C, paragraph 2, provides that the Family Share shall consist of
the remaining fractional share after deducting the Marital Deduction Share. Under
Article Four, the Family Share shall be held in trust, with the trustee applying for the
Spouse’s benefit, “such sums from the income and principal of the trust estate as the
trustee deems necessary or advisable from time to time for her maintenance in health
and reasonable comfort… .”
PLR-147519-09 2

   Decedent's United States Estate (and Generation-Skipping Transfer) Tax Return,

Form 706, was timely filed. Decedent’s gross estate consisted of jointly owned assets
and stocks and bonds. The personal representative reported assets jointly owned by
Decedent and Spouse on Schedule E, Jointly Owned Property, of Form 706. Pursuant
to § 2040(b), Decedent’s interest in such jointly owned property is $y. The balance of
Decedent’s estate consisted of stocks and bonds valued at $z, which were to be
allocated, held, administered and distributed in the Family Share. Accordingly, $z was
reported on Schedule B, Stocks and Bonds, of the Form 706. No property, either
probate or non-probate, passed to any person other than Spouse.

   On Schedule M, Bequests, etc., to Surviving Spouse, of Form 706, all of

Decedent’s interest in the assets reported on both Schedule B and Schedule E were
reported as property interests passing to the surviving spouse and qualifying for the
marital deduction. Further, a QTIP election was made with respect to all of these
assets. In computing the estate tax liability, the estate claimed a marital deduction for
the value of the jointly owned non-probate property and Decedent’s probate assets (the
stocks and bonds), which passed entirely to the Family Share in accordance with the
terms of Decedent’s will. The return reported an estate tax liability of zero.

   The jointly owned property included in the Decedent's gross estate that passed to

Spouse qualify for the marital deduction under § 2056(a); a QTIP election was not
required in order for these assets to qualify for the marital deduction.

  You request a ruling that, pursuant to Rev. Proc. 2001-38, 2001-1 C.B. 1335, the

QTIP election made with respect to the jointly owned assets and the assets passing to
the Family Share established under Decedent’s Will will be treated as null and void for
purposes of §§ 2044(a), 2056(b)(7), 2519(a), and 2652 of the Internal Revenue Code,
where the election was not necessary to reduce the estate tax liability to zero, based on
values as finally determined for federal estate tax purposes.

 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, except as limited by § 2056(b), the value of the

taxable estate is to be determined by deducting from the value of the gross estate an
amount equal to the value of any interest in property that 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) provides the general rule
that a marital deduction is not allowed 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
PLR-147519-09 3

spouse.

   Section 2056(b)(7) provides an exception to this terminable interest rule in the

case of QTIP. For purposes of § 2056(a), QTIP 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 § 2056(b)(7)(B)(i), QTIP 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 § 2056(b)(7)(B)(v) applies.

   Section 2056(b)(7)(B)(v) provides that the election to treat property as QTIP

under § 2056(b)(7) is made by the executor on the return of tax imposed by § 2001. The
election, once made, is irrevocable.

   Section 2044(a) and (b) provide 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 § 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 § 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, in the case of property
subject to an election under § 2056(b)(7), 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 § 2652(a)(3).

   In general, under Rev. Proc. 2001-38, a QTIP election under § 2056(b)(7) will be

treated as null and void for purposes of §§ 2044(a), 2056(b)(7), 2519(a), and 2652,
where the election was not necessary to reduce the estate tax liability to zero, based on
values as finally determined for federal estate tax purposes. The revenue procedure
provides an example where a QTIP election was made when the taxable estate (before
allowance of the marital deduction) was less than the applicable exclusion amount
under § 2010(c). Another example set forth in the revenue procedure is where the
decedent's will provides for a “credit shelter trust” to be funded with an amount equal to
the applicable exclusion amount under § 2010(c), with the balance of the estate passing
to a marital trust intended to qualify under § 2056(b)(7). The estate makes QTIP
elections with respect to both the credit shelter trust and the marital trust. 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. See Rev.
Proc. 2001-38, section 2.

  In this case, one-half the value of the jointly owned assets was included in

Decedent’s gross estate under § 2040(b), and qualified for the estate tax marital
deduction under § 2056(a). A QTIP election was not required in order for these assets
PLR-147519-09 4

to qualify for the marital deduction. Accordingly, the QTIP election made with respect to
the value of the jointly owned property passing to Spouse is null and void for purposes
of §§ 2044, 2056(b)(7), 2519, and 2652. In addition, the QTIP election made with
respect to the value of the property passing to the Family Share was not necessary to
reduce the estate tax liability to zero. In this case, the estate tax would have been zero
whether or not the election was made with respect to the Family Share. Accordingly,
the QTIP election with respect to the value of the property passing to the Family Share
is null and void for purposes of §§ 2044, 2056(b)(7), 2519, and 2652. The value of the
jointly owned property and the property held in the Family Share will not be includible in
Spouse’s gross estate under § 2044. Further, Spouse will not be treated as making a
gift under § 2519 if Spouse disposes of the income interest with respect to the Family
Share. Finally, Spouse will not be treated as the transferor of the jointly owned assets
or the property in the Family Share for generation-skipping transfer tax purposes under
§ 2652.

   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 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 representatives. 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
                                  Senior Counsel, Branch 4
                                  (Passthroughs & Special Industries)

Enclosures (2)
Copy for § 6110 purposes
Copy of this letter

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