Estate gets extra time to split a marital trust into QTIP and non-QTIP shares and fix its generation-skipping tax planning

Plain-English summary

When a spouse dies, property left in trust for the surviving spouse can qualify
for the unlimited estate-tax marital deduction if the executor makes a "QTIP"
election under § 2056(b)(7). Where only part of a trust is elected as QTIP, the
trust can be split into a QTIP (marital) share and a non-QTIP (exempt) share. Here
the decedent's will authorized that split, and the estate made a partial QTIP
election on its estate tax return, but the law firm never actually severed the
trust and also mishandled the generation-skipping transfer (GST) tax planning,
including an ineffective allocation of GST exemption to a grandchild's trust that
did not yet exist. Years later, the surviving spouse (as trustee) obtained state
court approval to sever the trust and sought IRS relief. The IRS granted three
extensions under the "9100 relief" rules: 120 days to sever the trust into QTIP
and non-QTIP trusts effective as of death, 120 days to allocate the decedent's GST
exemption between them, and 120 days to make a special election treating the QTIP
trust as two trusts (one GST-exempt with a zero inclusion ratio, one not). The net
effect lets the estate carry out the tax planning the will intended.

Ruling snapshot

• Question: May an estate get extensions of time to sever a partially-elected QTIP trust and to make the related GST exemption allocation and § 26.2652-2(c) election?
• Outcome: Approved (three 120-day extensions granted)
• Key authorities: IRC §§ 2056(b)(7), 2642(g), 2652(a)(3); Treas. Reg. §§ 20.2056(b)-7(b)(2)(ii), 26.2652-2(c), 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201840001                                              Third Party Communication: None
Release Date: 10/5/2018                                        Date of Communication: Not Applicable
Index Number: 2056.07-02, 9100.00-00,
              2642.00-00, 2652.01-02                           Person To Contact:
                                                               ----------------, ID No. ------------------
------------------------------------                           Telephone Number:
-------------------------------------------------              ----------------------
---------------------------------                              Refer Reply To:
                                                               CC:PSI:B04
-------------------------------------------                    PLR-102775-18
                                                               Date: June 20, 2018




LEGEND

Decedent                   =        -----------------------------------------------
Date 1                     =        ----------------------
Spouse                     =        ----------------------
Daughter                   =        --------------------
Granddaughter              =        --------------------------------
Trust                      =        --------------------------------------------------
Law Firm                   =        ----------------------------------------------
a                          =        --------
b                          =        --------
x                          =        --------------
y                          =        --------------
z                          =        ------------
Date 2                     =        ------------------
Date 3                     =        ------------------
Date 4                     =        --------------------
State Court                =        ---------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------

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

This letter responds to the letter dated December 22, 2017, submitted by your
authorized representative requesting an extension of time under § 301.9100-3 of the
Procedure and Administration Regulations to sever a trust into a qualified terminable
interest property (QTIP) trust and a non-QTIP trust under § 20.2056(b)-7(b)(2)(ii) of the
Estate Tax Regulations, and requesting additional rulings with respect to the severed
trusts.

FACTS

The facts submitted and the representations made are as follows:

Decedent died testate on Date 1, survived by Spouse, Daughter, and Granddaughter.
Spouse was named executrix of Decedent’s estate under Decedent’s will.

In Article IV of Decedent’s will, the residue remaining after certain specific bequests is
bequeathed to the trustees of Trust, to be held, administered and distributed as set forth
in Article IV of Decedent’s will.

Under Article IV(1), the executrix “shall elect the portion of [Decedent’s] estate passing
under this Article IV which, in her discretion, she determines should qualify for the
estate tax marital deduction allowable in determining federal estate taxes on
[Decedent’s] estate…but only to the extent that such items are included in [Decedent’s]
gross estate and are allowable as a marital deduction for federal tax purposes.”

Article IV(1) further provides that the trustees shall distribute all of the trust income to
Spouse at least quarterly. If the trustees determine the trust income is not adequate for
the needs of Spouse’s support in her accustomed manner of living, including medical,
dental, hospital and nursing expenses, the trustees may distribute such amounts of trust
principal as they deem necessary for such purpose.

Article IV(1)(b)(i) provides that the trustees:

       shall have the discretionary power and authority to divide the trust estate
       into two separate trusts, one to hold that portion of the trust which
       [Decedent’s] Executrix elects to qualify for the federal estate tax marital
       deduction (“Marital Trust”) with the second trust to hold property
       representative of the balance of the trust estate (“Exempt Trust”). In the
       event the Trustees elect to so divide the trust estate into two trusts, the
       allocation of trust assets as between the Marital Trust and Exempt Trust
       shall be in accordance with the elections for federal estate taxes as made
       by [Decedent’s] Executrix. The decision of the Trustees as to the property
       allocated to each trust shall be final and conclusive upon all parties;
       provided, that there may not be allocated to the Marital Trust any property
       with respect to which no marital deduction would be allowed if such
       property had passed to [Decedent’s] wife free of trust…”

Article IV(3)(a) provides that upon Spouse’s death, a trust is to be created for the benefit
of Granddaughter (Granddaughter’s Trust), to be funded with the lesser of the amount
which may pass to or for the benefit of Granddaughter free from any generation-
skipping transfer (GST) tax imposed under chapter 13 of the Code of 1986, or the [then
present] exemption amount of $1,000,000. In the event the GST tax is repealed or

otherwise no longer in effect as of the death of Spouse, Granddaughter’s Trust is to be
funded with $1,000,000.

Article IV(3)(b) provides that the balance of Trust remaining after Spouse’s death and
after funding Granddaughter’s Trust as provided in Article IV(3)(a), shall be distributed
in accordance with Spouse’s testamentary power to appoint to or for the benefit of one
or more appointees other than Spouse, her creditors, her estate or the creditors of her
estate.

Article IV(3)(c) provides that in the event of nonexercise of Spouse’s testamentary
power to appoint, the remainder of Trust shall pass to Daughter. In the event Daughter
predeceases Spouse, the remainder of Trust is to be distributed to Granddaughter’s
Trust.

After Decedent’s death, Spouse, as Executrix of Decedent’s estate, retained Law Firm
to advise her regarding the administration of Decedent’s estate, including preparation of
Form 706 (United States Estate (and Generation-Skipping Transfer) Tax Return).
Law Firm did not advise Spouse to sever Trust into a “Marital Trust” (QTIP Trust) and
“Exempt Trust” (Non-QTIP Trust) as provided under Article IV(1)(b)(i). Law Firm
prepared Form 706 for Decedent’s estate, which was timely filed.

On Schedule M, Part 2, of Form 706, Decedent’s estate made an election under
§ 2056(b)(7) to treat an a% portion of Trust as QTIP. Schedule M, Part 2 reported the
total value of property interests subject to the QTIP election as $x, determined to be a%
of the total value ($y) of the assets funding Trust. No QTIP election was made for the
balance of Trust (the b% portion of Trust), valued at $z ($y - $x).

On Schedule R, Part 1, of Form 706, Decedent’s estate checked the box to make a
special election under § 2652(a)(3) to treat assets, for GST tax purposes, as if the
election under § 2056(b)(7) had not been made (a “reverse QTIP election”). Intending
to shield Granddaughter’s Trust from the imposition of GST tax, a trust which pursuant
to the terms of Trust in Article IV of Decedent’s will was to be created after the death of
Spouse, Law Firm improperly and ineffectively allocated Decedent’s entire unused GST
exemption to Granddaughter’s Trust on line 6 of Schedule R, Part 3.

Subsequent to the filing of Decedent’s Form 706, § 26.2652-2(c) of the Generation-
Skipping Transfer Tax Regulations was issued. This regulation provides a transitional
rule that allows certain trusts subject to a reverse QTIP election 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 is June 24,
1996.

On Date 2, under the authority of Article IV(1)(b)(i), Spouse, as trustee of Trust,
petitioned State Court for approval of a Nonjudicial Agreement dated Date 3, regarding
Trust. The Nonjudicial Agreement provides for the severance of Trust into QTIP Trust,
to hold the a% portion, and Non-QTIP Trust, to hold the b% portion. QTIP Trust and
Non-QTIP Trust will have terms identical to those of Trust and all distributions of
principal will be made pro rata from each trust. The effective date of the Nonjudicial
Agreement is the date of issuance of a private letter ruling from the Internal Revenue
Service. State Court granted Spouse’s petition in an order dated Date 4.

No GSTs have been made from Trust.

You request the following rulings:

1.      That Decedent’s estate is granted an extension of time under § 301.9100-3 and
§ 20.2056(b)-7(b)(2)(ii) to sever Trust, on a fractional basis, with the a% portion to be
identified as the QTIP Trust and the b% portion to be identified as the Non-QTIP Trust,
effective as of Decedent’s date of death.

2.    That Decedent’s estate is granted an extension of time under § 2642(g) and
§ 301.9100-3 to allocate Decedent’s available GST exemption to Non-QTIP Trust and
QTIP Trust, effective as of Decedent’s date of death.

3.     That Decedent’s estate is granted an extension of time under § 301.9100-3 to
make an election to treat QTIP Trust as two separate trusts pursuant to § 26.2652-2(c),
so that one has an inclusion ratio of zero (identified as the GST Exempt QTIP Trust)
and one has an inclusion ratio of one (identified as the GST Non-Exempt QTIP Trust)
for GST tax purposes, and, further, that the reverse QTIP election will be treated as
applying only to the GST Exempt QTIP Trust.

LAW AND ANALYSIS

Ruling 1

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 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)(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.

Under § 2056(b)(7), a marital deduction is allowed for qualified terminable interest
property (QTIP), which is defined in § 2056(b)(7)(B)(i) 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)(B)(v) applies.

Section 2056(b)(7)(B)(iv) provides that a specific portion of property shall be treated as
separate property.

Section 2056(b)(7)(B)(v) provides that an election 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.

Section 20.2056(b)-7(b)(2)(i) provides that the QTIP election may relate to all or any
part of property that meets the requirements of § 2056(b)(7)(B)(i), provided that any
partial election must be made with respect to a fractional or percentage share of the
property. The fraction or percentage may be defined by a formula.

Section 20.2056(b)-7(b)(2)(ii)(A) provides that, in general, a trust may be divided into
separate trusts to reflect a partial election that has been made, or is to be made, if
authorized under the governing instrument or otherwise permissible under local law.
Any such division must be accomplished no later than the end of the period of estate
administration. If, at the time of the filing of the estate tax return, the trust has not yet
been divided, the intent to divide the trust must be unequivocally signified on the estate
tax return.

Section 20.2056(b)-7(b)(4)(i) provides that, in general, the election referred to in
§ 2056(b)(7)(B)(i)(III) and (v) is made on the return of tax imposed by § 2001 (or
§ 2101). For purposes of this paragraph, the term “return of tax imposed by § 2001”
means the last estate tax return filed by the executor on or before the due date of the
return, including extensions or, if a timely return is not filed, the first estate tax return
filed by the executor after the due date.

Under § 301.9100-1(c), 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 301.9100-2 provides automatic extensions of time for making certain elections.
Section 301.9100-3 provides extensions of time for making elections that do not meet
the requirements of § 301.9100-2.


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 the grant of 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.

In the present case, Article IV(1) specifically authorizes the trustees of Trust to elect to
have a specific portion, or all, of Trust treated as QTIP. On Decedent’s Form 706, a
partial QTIP election was made with respect to a% of Trust. Under Article IV(1)(b)(i),
the trustees have discretionary power and authority to divide the trust estate into two
separate trusts: a QTIP Trust, referred to in Article IV as the Marital Trust, and a non-
QTIP Trust, referred to in Article IV as the Exempt Trust.

Based on the facts presented and the representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Accordingly, Decedent’s estate is
granted 120 days from the date of this letter to sever Trust, on a fractional basis, into
QTIP Trust and Non-QTIP Trust. For estate tax purposes, the severance will be
effective as of the date of Decedent’s death. The severance should be made on a
supplemental Form 706 within 120 days from the date of this letter unequivocally
signifying the severance of Trust.

Rulings 2 and 3

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) (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)(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.

Under § 2652(a)(1) and § 26.2652-1(a)(1), the individual with respect to whom property
was last subject to federal estate or gift tax is the transferor of that property for purposes
of the GST tax imposed under chapter 13.

Section 2652(a)(3) provides that, in the case of any property with respect to 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 GST tax purposes as if the election
to be treated as qualified terminable interest property had not been made.

The election under § 2652(a)(3) 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, 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(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
§ 26.2652-2(c) is made by attaching a statement to a copy of the Form 706 on which

the reverse QTIP election was made under § 2652(a). The statement is to be filed
before June 24, 1996.

Section 2642(b)(2) provides generally that if property is transferred as a result of the
death of the transferor, the value of the property for purposes of determining the
inclusion ratio under § 2642(a)(1) shall be the value of the property as finally determined
for estate tax purposes.

Section 2642(g)(1)(A) provides, generally, that the Secretary shall by regulation
prescribe such circumstances and procedures under which extensions of time will be
granted to make an allocation of GST exemption described in § 2641(b)(1) or (2), and
an election under § 2632(b)(3) or (c)(5). Such regulations shall include procedures for
requesting comparable relief with respect to transfers made before the date of the
enactment of § 2642(g)(1)(A), which was enacted into law on June 7, 2001.

Section 2642(g)(1)(B) provides that in determining whether to grant relief under this
paragraph, the Secretary shall take into account all relevant circumstances, including
evidence of intent contained in the trust instrument or instrument of transfer and such
other factors as the Secretary deems relevant. For purposes of determining whether to
grant relief under this paragraph, the time for making the allocation (or election) shall be
treated as if not expressly prescribed by statute.

Notice 2001-50, 2001-34 I.R.B. 189, provides, in part, that under § 2642(g)(1)(B), the
time for allocating the GST exemption to transfers at death is to be treated as if not
expressly prescribed by statute. The Notice further provides that taxpayers may seek
an extension of time to make an allocation described in § 2642(b)(2) under the
provisions of § 301.9100-3.

Based on the facts submitted and representations made, we have determined that the
standards of § 301.9100-3 have been met. Therefore, an extension of time of 120 days
from the date of this letter is granted under § 2642(g)(1) to allocate a portion of
Decedent’s unused GST exemption to the Non-QTIP Trust, so that Non-QTIP Trust will
have an inclusion ratio of zero, and the balance to QTIP Trust. The allocations will be
effective as of Decedent’s date of death. Further, an extension of time of 120 days from
the date of this letter is granted to make the election under § 26.2652-2(c) to treat QTIP
Trust as two separate trusts, one to be referred to as the GST Exempt QTIP Trust and
the other as the GST Non-Exempt QTIP Trust. The GST Exempt QTIP Trust will have a
zero inclusion ratio by reason of the allocation of an amount of Decedent's GST
exemption to the QTIP Trust, and the GST Non-Exempt QTIP Trust will have an
inclusion ratio of one. The reverse QTIP election will be treated as applying only to the
GST Exempt QTIP Trust and, therefore, Decedent will be considered the transferor of
the GST Exempt QTIP Trust, while Spouse will be treated as the transferor of the GST
Non-Exempt QTIP Trust.

The allocation of Decedent’s GST exemption should be made on a supplemental
Form 706 filed within 120 days from the date of this letter. The election under
§ 26.2652-2(c) should be made by completing the statement required in § 26.2652-2(c)
and attaching the statement to the supplemental Form 706. The Form 706 should be
filed with the Cincinnati Service Center at the following address: Internal Revenue
Service Center, Cincinnati, OH 45999. A copy of this letter should also be attached to
the supplemental Form 706. A copy is enclosed for this purpose.

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

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.


                                           Sincerely,

                                           Associate Chief Counsel
                                           (Passthroughs & Special Industries)


                                           Karlene M. Lesho
                                       By: ______________________________
                                           Karlene M. Lesho
                                           Senior Technician Reviewer, Branch 4
                                           Office of the Associate Chief Counsel
                                           (Passthroughs & Special Industries)




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