Trust received more time to divide a reverse QTIP election

Plain-English summary

An estate had made a reverse QTIP election for a marital trust and allocated the decedent's remaining generation-skipping transfer tax exemption to that trust. A later transitional regulation allowed qualifying trusts to be treated as two separate trusts, one with a zero inclusion ratio and one with an inclusion ratio of one, but the trustee's advisers did not identify the election before its 1996 deadline. The trustee requested an extension under Treasury Regulation § 301.9100-3 after learning of the missed election. The IRS found that the relief requirements were satisfied and granted 120 days to make the election under Treasury Regulation § 26.2652-2(c). The reverse QTIP election would apply only to the separate trust with the zero inclusion ratio.

Ruling snapshot

• Question: Could the trustee receive more time to elect to divide the marital trust into two trusts for generation-skipping transfer tax purposes?
• Outcome: Approved.
• Key authorities: IRC §§ 2056, 2601, 2611, 2631, 2632, 2641, 2642, 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: 201642004 Third Party Communication: None
Release Date: 10/14/2016 Date of Communication: Not Applicable
Index Number: 2652.00-00, 2652.01-02,
9100.00-00 Person To Contact:
----------------, ID No. ------------------
------------------------------ Telephone Number:
--------------------------- ----------------------
--------------------------------- Refer Reply To:
CC:PSI:04
PLR-102553-16
Date:
July 12, 2016
---------------------------------------------------

LEGEND

Decedent = ---------------------------------------------------------
Date 1 = ----------------------------
Spouse = -----------------------------------
Child 1 = ------------------------------
Child 2 = ----------------------------------
Child 3 = --------------------------
Date 2 = ------------------------
Family Trust = --------------------------------------------------------------------------------

Marital Trust = ---------------------------------------------------------------------------------

Attorney = ----------------------
Accountant = --------------------------
a = ------------
Date 3 = ---------------------------
Year = -------
Date 4 = -------------------

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

This letter responds to the letter dated December 28, 2015, and subsequent
correspondence, submitted by your authorized representative, requesting an extension
PLR-102553-16 2

of time under § 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.

FACTS

The facts and representations submitted are as follows.

Decedent died testate on Date 1, survived by Spouse and children, Child 1, Child 2, and
Child 3. Child 3 died on Date 2, survived by three children. Under Decedent’s will,
Marital Trust and Family Trust were established. During Spouse’s lifetime, Spouse is
the sole income beneficiary of Marital Trust.

Spouse, as executrix of Decedent’s estate, retained Attorney to assist in the probating
of Decedent’s estate and Accountant to prepare and file Decedent’s Form 706, United
States Estate (and Generation-Skipping Transfer) Tax Return. The executrix elected to
treat Marital Trust as qualified terminable interest property (QTIP) so that Marital Trust
qualified for the marital deduction under § 2056(b)(7). In addition, the executrix made a
special election under § 2652(a)(3) to treat the assets of Marital Trust, for
generation-skipping transfer (GST) tax purposes, as if the election under § 2056(b)(7)
had not been made (a “reverse” QTIP election). The executrix allocated $a of
Decedent’s GST exemption to Family Trust and Decedent’s remaining GST exemption
to Marital Trust. Spouse timely filed the return (with extensions) on Date 3 (a date prior
to December 27, 1995).

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.

In Year, Spouse resigned as trustee of Marital Trust and Child 1 succeeded Spouse as
trustee of Marital Trust. Spouse died on Date 4. During Spouse’s term as trustee and
Child 1’s term as successor trustee, Attorney and Accountant never advised Spouse or
Child 1 of the election under § 26.2652-2(c). Upon the death of Spouse, trustee
obtained advice from a law firm and became aware of the election under
§ 26.2652-2(c).

You have requested an extension of time under § 301.9100-3 to elect to treat Marital
Trust as two separate trusts pursuant to § 26.2652-2(c) so that for purposes of the
GST tax, one trust will have an inclusion ratio of zero due to the previous allocation of
Decedent’s unused GST exemption to Marital Trust, and the other will have an inclusion
PLR-102553-16 3

ratio of one. The “reverse” QTIP election would be treated as applying only to the trust
with the zero inclusion ratio.

LAW AND ANALYSIS

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.

Section 2602 provides that the amount of the tax imposed by § 2601 is the taxable
amount multiplied by the applicable rate. Section 2641(a) defines the applicable rate as
the product of the maximum federal estate tax rate and the inclusion ratio with respect
to the transfer. Under § 2642(a), the inclusion ratio with respect to any property
transferred in a GST is the excess (if any) of one over the applicable fraction. The
applicable fraction, as defined in § 2642(a)(2), is a fraction, the numerator of which is
the amount of the GST exemption under § 2631 allocated to the trust, and the
denominator of which is the value of the property transferred to the trust.

Section 2631(a), as effective in 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)(1) 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 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 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
PLR-102553-16 4

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 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).

Section 301.9100-3(a) provides, in part, that 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 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
Cincinnati Service Center at the following address: Internal Revenue Service,
Cincinnati Service Center, Stop 82, Cincinnati, OH 45999.

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.

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-102553-16 5

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

                                   Sincerely,

                                   Leslie H. Finlow
                                   Leslie H. Finlow
                                   Senior Technician Reviewer, Branch 4
                                   Office of Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2)

cc: