PLR 201147009: IRS allows late reverse QTIP and split-trust elections

Plain-English summary

An estate made a QTIP election for a marital trust but did not make a reverse QTIP election or affirmatively allocate the decedent's generation-skipping transfer tax exemption. The estate also missed the election to treat the marital trust as two separate trusts, one with a zero inclusion ratio and one with an inclusion ratio of one. Because the estate relied on its law firm and satisfied the relief standards, the IRS granted 120-day extensions for both elections. The reverse QTIP election was to apply to the zero-inclusion-ratio trust, with the decedent treated as its GST transferor.

Ruling snapshot

• Question: May the estate make late reverse QTIP and separate-trust elections for the marital trust?
• Outcome: Approved, subject to making both elections within 120 days and following the specified filing procedures.
• Key authorities: IRC §§ 2056, 2601, 2631, 2632, 2642, and 2652; Treas. Reg. §§ 26.2652-2(c), 301.9100-1, 301.9100-2, and 301.9100-3.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201147009
Release Date: 11/25/2011
Index Number: 2632.00-00, 2652.00-00,
Person To Contact:
2652.01-00, 2652.01-02,
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Telephone Number:
9100.00-00
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Refer Reply To:
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CC:PSI:B04 – PLR-107919-11
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Date: JULY 29, 2011
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Re:
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Legend:

Decedent = --------------------------
Wife = -------------------------
Date 1 = --------------------------
Date 2 = ------------------------------------------------------------------------------------------------ Marital = ------------------------------------------------------------------------------------------------
Trust
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= ---------------------------------------- Law Firm

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

This letter responds to a letter from your authorized representative dated February 16, 2011, and other correspondence, requesting an extension of time under § 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 and to make an election to treat a marital trust as two separate trusts under § 26.2652-2(c) of the Generation-Skipping Transfer Tax Regulations.

The facts and representations submitted are summarized as follows: On Date 1, Decedent died, survived by his descendants and Wife. Marital Trust was the only trust established under the terms of Decedent’s Will. Decedent’s estate relied on Law Firm to prepare the Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return for the estate. On Schedule M of the Form 706, an election was made under § 2056(b)(7) to treat Marital Trust as qualified terminable interest property. A Schedule R was not attached to the Form 706. Thus, the estate did not make a reverse QTIP election and did not affirmatively allocate Decedent's generation-skipping transfer (GST)
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exemption. It is represented that Decedent’s full GST exemption was available at his death and that no direct skips, or other transfers to which his exemption amount could be allocated, occurred at his death. In a Date 2 letter to the estate, the Internal Revenue Service accepted the Form 706 as filed.

Taxpayer requests extensions of time under §§ 301.9100-1 and 301.9100-3 to make the reverse QTIP election under § 2652(a)(3) with respect to Marital Trust and to make an election to treat Marital Trust as two separate trusts pursuant to § 26.2652-2(c) so that one trust has an inclusion ratio of zero and the other trust has an inclusion ratio of one for GST tax purposes. The reverse QTIP election would be treated as applying only to the trust with the zero inclusion ratio.

Section 2601 imposes a tax on every generation-skipping transfer. A GST 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 tax is the taxable amount multiplied by the applicable rate. Section 2641(a) defines “applicable rate” as the product of the maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

Section 2631(a) (in effect at the time of Decedent’s death) provided that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption of $1,000,000 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.

Under § 2632(c) (in effect at the time of Decedent’s death), a decedent's unused GST exemption is automatically allocated on the due date for filing the estate tax return for such individual's estate, to the extent not otherwise allocated by the decedent's executor on or before that date. The automatic allocation is irrevocable.

Section 2652(a)(3) states that, with respect to any trust for which a deduction is allowed under § 2056(b)(7) (regarding qualified terminable interest property), the estate of the decedent may elect to treat all of the property in such trust for purposes of the GST tax provisions as if the QTIP election had not been made. This election is referred to as the “reverse” QTIP election. The consequence of a reverse QTIP election is that
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the decedent remains, for GST tax purposes, the transferor of the QTIP trust for which the election is made. As a result, the decedent's GST exemption may be allocated to that QTIP trust.

Section 26.2652-2(a) provides 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(c) provides that if a reverse QTIP election is made with respect to a trust prior to December 27, 1995, and the GST exemption has been allocated to that trust, the transferor (or the transferor's executor) may elect to treat the trust as two separate trusts, one of which has a zero inclusion ratio by reason of the transferor's GST exemption previously allocated to the trust. The separate trust with the zero inclusion ratio consists of that fractional share of the value of the entire trust equal to the value of the nontax portion of the trust under § 26.2642-4(a). The reverse QTIP election is treated as applying only to the trust with the zero inclusion ratio. An election under this section is made by attaching a statement to a copy of the return on which the reverse QTIP election was made under § 2652(a). The statement is to be filed before June 24, 1996.

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). Under § 301.9100-1(b), a regulatory election includes an election whose due date is prescribed by a notice published in the Internal Revenue Bulletin. In accordance with § 2642(g)(1)(B) and Notice 2001-50, taxpayers may seek an extension of time to make an allocation described in § 2642(b)(1) under the provisions of § 301.9100-3.

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.
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Based on the facts submitted and the representations made, we conclude that the requirements of § 301.9100-3 have been satisfied. Therefore, Taxpayer is granted an extension of time of 120 days from the date of this letter to make a reverse QTIP election pursuant to § 2652(a)(3), effective as of the date of Decedent’s death, with respect to Marital Trust. The automatic allocation of Decedent’s GST exemption will be effective as of the date of Decedent's death with respect to Marital Trust. Taxpayer is also granted an extension of time of 120 days from the date of this letter to make the election under § 26.2652-2(c) to treat Marital Trust as two separate trusts, one of which has a zero inclusion ratio by reason of Decedent's GST exemption allocated to Marital Trust, the other of which has an inclusion ratio of one. The reverse QTIP election will be treated as applying only to the trust with the zero inclusion ratio, and Decedent will be considered the transferor of this portion of Marital Trust.

The reverse QTIP election should be made on a supplemental Form 706. A copy of this letter should be attached to the supplemental Form 706. The election under § 26.2652-2(c) should be made by completing the statement required in § 26.2652-2(c) and submitting the election, and a copy of the original Form 706 filed by Decedent’s estate, along with the supplemental Form 706 on which the reverse QTIP election is made under § 2652(a)(3), to the Cincinnati Service Center at the following address: Internal Revenue Service, Cincinnati Service Center - Stop 82, Cincinnati, OH 45999. A copy is enclosed for this purpose.

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.
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Except as specifically ruled herein, no opinion is expressed or implied concerning the federal tax consequences of any aspect of any transaction or item discussed or referenced in this letter. Specifically, we are not ruling on whether Trust will have a zero inclusion ratio as a result of Taxpayers’ allocations of their GST exemptions to the Year 1 transfers to the trust.

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

In accordance with a power of attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

Associate Chief Counsel
(Passthroughs and Special Industries)

By: ____
Leslie H. Finlow
Senior Technician Reviewer
Branch 4
Office of Associate Chief Counsel
(Passthroughs and Special Industries)

Enclosures
Copy for section 6110 purposes
Copy of this letter