PLR 201349005: IRS grants more time to divide a reverse-QTIP trust

Plain-English summary

An estate had made a QTIP election, a reverse QTIP election, and an allocation of generation-skipping transfer tax exemption to a marital trust. After the filing, a regulation allowed certain trusts to be treated as two separate trusts, but the deadline for that election had passed. The IRS granted the trustee an additional 120 days to make the election because the submitted facts and representations satisfied the rules for late regulatory-election relief. If made, the election would divide the marital trust into one portion with a zero inclusion ratio and another portion with an inclusion ratio of one for GST tax purposes.

Ruling snapshot

• Question: Could the trustee receive an extension to elect to treat the marital trust as two separate trusts under § 26.2652-2(c)?
• Outcome: approved
• Key authorities: IRC §§ 2056, 2601, 2602, 2611, 2631, 2632, 2641, and 2652; Treas. Reg. §§ 26.2652-2(c) and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201349005                                              Third Party Communication: None
Release Date: 12/6/2013                                        Date of Communication: Not Applicable
Index Number: 2652.01-02, 9100.00-00
                                                               Person To Contact:
--------------------------------------------                   ----------------, ID No. ------------------
--------------------------------------------                   Telephone Number:
--------------------------------------                         -------------------
------------------------------                                 Refer Reply To:
---------------------------------                              CC:PSI:04
 -----------------------------------                           PLR-112165-13
                                                               Date:
RE: ---------------------------------------------              August 28, 2013
----------------------------------------------------




Legend

Date 1                     =        ---------------------------
Decedent                   =        ---------------------------
Trust                      =        ------------------------------------------------------------------
Date 2                     =        ----------------------
Spouse                     =        ------------------------------
Marital Trust              =        ---------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Bank                       =        --------------------------------------------
Law Firm                   =        ---------------------------------
Date 3                     =        -----------------
x                          =        ------------



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

      This letter responds to your submission dated March 2, 2013, requesting an
extension of time pursuant to § 301.9100-3 of the Procedure and Administration
Regulations to treat a trust as two separate trusts under § 26.2652-2(c) of the
Generation-Skipping Transfer Tax Regulations.

         The facts and representations submitted are as follows.

       On Date 1, Decedent established Trust, a revocable trust. Decedent died on
Date 2, survived by Spouse and three children. On Decedent’s death, Trust became
irrevocable.
PLR-112165-13                                 2


      Article 7 of Trust provides for the creation of Marital Trust after the death of
Decedent for the lifetime benefit of Spouse. Under the provisions of Article 7, a
generation-skipping transfer (GST) from Marital Trust could occur upon the death of
Spouse.

        Bank, acting as executor of Decedent’s estate, hired Law Firm to assist Bank in
preparing and reviewing Decedent’s Form 706, United States Estate (and Generation-
Skipping Transfer) Tax Return. Bank timely filed Form 706 on Date 3. Following Law
Firm’s advice and recommendations, Bank, as relevant here: (a) elected to treat the
assets of Marital Trust as qualified terminal interest property (QTIP) so that the amount
passing to Marital Trust qualified for the marital deduction under § 2056(b)(7) of the
Internal Revenue Code; (b) elected under § 2652(a)(3) to treat the assets of Marital
Trust, for GST tax purposes, as if the election under § 2056(b)(7) had not been made (a
reverse QTIP election); and (c) on Schedule R of Form 706, allocated $x of Decedent’s
GST exemption to Marital Trust.

        The value of the assets of Marital Trust as of Decedent’s date of death exceeded
the allocation of Decedent’s GST exemption allocated thereto, resulting in an inclusion
ratio of more than zero and less than one.

       Subsequent to the filing of Decedent’s Form 706, § 26.2652-2(c) was issued.
This regulation provides a transitional rule that allows certain trusts subject to a reverse
QTIP election, to which GST exemption had been allocated, to be treated as two
separate trusts, so that only a portion of the trust would be treated as subject to the
reverse QTIP election, and that portion would be treated as having a zero inclusion
ratio. The deadline for making the election set forth in the transitional rule was
June 24, 1996.

       For a period after the filing of Form 706 and after the issuance of § 26.2652-2(c),
Bank continued to retain the services of Law Firm in settling Decedent’s estate. Law
Firm did not provide any advice to Bank about the possibility of dividing Marital Trust.

        Bank, acting as the trustee of Marital Trust, is requesting an extension of time to
elect to treat Marital Trust as two separate trusts pursuant to § 26.2652-2(c) so that one
trust has an inclusion ratio of zero due to the previous allocation of Decedent’s GST
exemption of $x to Marital Trust and the other 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 GST. A GST is defined under § 2611(a) as
(1) a taxable distribution, (2) a taxable termination, and (3) a direct skip.
PLR-112165-13                                 3

       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), as in effect for the year at issue, 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.

        Section 2652(a)(3) states that, with respect to any trust for which a deduction is
allowed under § 2056(b)(7) (regarding QTIP), 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 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.

       On December 26, 1995, the Internal Revenue Service published final regulations
under Chapter 13 of the Code in T.D. 8644, which added § 26.2652-2(c) to the
regulations. 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 301.9100-3(a) provides, in part, that requests for relief subject to
§ 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
PLR-112165-13                                  4

faith, and the grant of relief will not prejudice the interests of the Government.

       Section 301.9100-3(b)(1)(iii) provides that a taxpayer is deemed to have acted
reasonably and in good faith if the taxpayer failed to make the election because, after
exercising reasonable diligence (taking into account the taxpayer’s experience and the
complexity of the return or issue), the taxpayer was unaware of the necessity for the
election.

      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.

      Section 301.9100-3(c)(1) provides, in part, that the Commissioner will grant a
reasonable extension of time to make a regulatory election only when the interests of
the Government will not be prejudiced by the granting of relief.

       Based on the facts submitted and the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Accordingly, an extension of
time of 120 days from the date of this letter is granted in which 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 previously allocated to
Marital Trust. The election should be made by completing the statement required in
§ 26.2652-2(c) and submitting the election, a copy of the return on which the reverse
QTIP election was made under § 2652(a)(3), and a copy of this letter, to the ---------------
Service Center at the following address: Internal Revenue Service, --------------- Service
Center, Stop 82, --------------- ------ ---------.

      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 representative.

      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.
PLR-112165-13                              5

       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.

                                    Sincerely,



                                    James F. Hogan
                                    Chief, Branch 4
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)
Enclosures (2)