Late "reverse QTIP" election allowed so a marital trust keeps the decedent's GST exemption

Plain-English summary

When a person leaves property to a marital ("QTIP") trust for a surviving spouse, the spouse is normally treated as the transferor of that trust for generation-skipping transfer (GST) tax purposes. A "reverse QTIP" election under Internal Revenue Code § 2652(a)(3) lets the estate instead keep the deceased spouse as the transferor, so the deceased spouse's GST exemption can shelter the trust from GST tax on later transfers to grandchildren. Here the estate's accounting firm timely filed the estate tax return (Form 706) and made the regular QTIP election for the marital trust, but forgot to make the reverse QTIP election and left off the schedule needed to allocate the decedent's GST exemption to the trust. The estate asked the IRS for extra time under the "9100 relief" regulations (Treas. Reg. § 301.9100-3), which allow a missed election to be treated as timely when the taxpayer acted reasonably and in good faith and relief will not prejudice the government. The IRS granted a 120-day extension to make the reverse QTIP election on a supplemental Form 706, and confirmed that the automatic GST allocation rules will apply to allocate the decedent's remaining GST exemption to the trust. This preserves the estate plan's goal of minimizing GST tax on property that eventually passes to younger generations.

Ruling snapshot

• Question: Should the estate get an extension of time under § 301.9100-3 to make a late reverse QTIP election under § 2652(a)(3) and allocate the decedent's GST exemption to the trust?
• Outcome: Approved (120-day extension granted; automatic GST allocation rules apply)
• Key authorities: IRC §§ 2652(a)(3), 2632(e)(1), 2056(b)(7); Treas. Reg. §§ 26.2652-2, 26.2632-1(d)(2), 301.9100-3

Full text (IRS public release)

Internal Revenue Service                          Department of the Treasury
                                                  Washington, DC 20224

Number: 201845010                     Third Party Communication: None
Release Date: 11/9/2018               Date of Communication: Not Applicable
Index Number: 9100.00-00, 2652.01-02
                                      Person To Contact:
----------------------------------------------------------    ----------------, ID No. ------------------
---------------------------                                   Telephone Number:
------------------------------                                ----------------------
                                      Refer Reply To:
                                      CC:PSI:04
                                      PLR-104126-18
                                      Date:
         RE: -------------------------------------            July 24, 2018




LEGEND

Date 1                           =     ----------------------
Decedent                         =     ---------------------------------------------------
Trust                            =     -----------------------------------------------
Date 2                           =     ----------------------
Date 3                           =     --------------------------
Spouse                           =     ------------------------
Accountant Firm                  =     -----------------------------------

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

This letter responds to your representative's letter of January 10, 2018, requesting an
extension of time under § 301.9100 and § 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 apply the
automatic allocation rules to allocate Decedent's GST exemption to the trust.

FACTS

The facts and representations submitted are summarized as follows. On Date 1,
Decedent created a revocable trust, Trust. Trust was completely restated on Date 2.
Decedent died testate on Date 3, survived by Spouse and children.

Under the terms of Trust, upon the Decedent's death, the trustee has the power to
create Trust A and Trust B.

Under Article 3, Paragraph 4, the trustee is to distribute all the net income of Trust B to
Spouse. The trustee may also distribute such amounts of principal to Spouse as the
trustee deems advisable for Spouse's health, education, support or maintenance.
Upon Spouse's death, the property of Trust B is to be distributed to Decedent's issue in
such amounts and upon such terms as Spouse may appoint by express reference in
Spouse's last will and testament.

Article 5, Section 6, provides, in part, that Decedent intends to eliminate (or to reduce as
fully as possible by law) any GST taxes on transfers of property pursuant to Trust.
Under Article 5, Paragraph 6.6, the trustee is empowered to make a QTIP election or a
reverse QTIP election over any asset for both estate and GST tax purposes and to
allocate the unused portion of Decedent's GST exemption to any property with respect
to which Decedent is the transferor for GST tax purposes in such manner the trustee
deems advisable.

Article 1, Paragraph 4, provides that the provisions of Article 5, Section 6 regarding the
GST omnibus provisions shall apply to Trust A and Trust B created under Article 3.

Spouse, as the executor of Decedent's estate, engaged Accounting Firm to prepare
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which
was timely filed. On Schedule M, Accounting Firm reported property passing to Trust B
as QTIP, and, therefore, the executor of Decedent's estate is deemed to have made the
QTIP election to have Trust B treated as QTIP under § 2056(b)(7). Accounting Firm
failed to make a "reverse" QTIP election under § 2652 with respect to Trust B.
Accounting Firm also failed to attach Schedule R to the Form 706 and, as a result,
Decedent's GST exemption was not affirmatively allocated to Trust B. It is represented
that Decedent has sufficient remaining GST exemption to allocate to Trust B.

LAW AND ANALYSIS

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, except as limited by § 2056(b), be determined by deducting
from the value of the gross estate an amount equal to the value of any interest in
property which 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 that, where, on the lapse of time, on the occurrence of an
event or contingency, or on the failure of an event or contingency to occur, an interest
passing to the surviving spouse will terminate or fail, no deduction shall be allowed
under this section with respect to such interest —

       (A) if an interest in such property passes or has passed (for less that an
adequate consideration in money or money's worth) from the decedent to any person
other than such surviving spouse (or the estate of such spouse); and

       (B) if by reason of such passing such person (or his heirs or assigns) may
possess or enjoy any part of such property after such termination or failure of the
interest so passing to the surviving spouse;

and no deduction shall be allowed with respect to such interest.

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.

Section 2056(b)(7)(B)(i) defines the term "qualified terminable interest property" as
property which passes from the decedent, in which the surviving spouse has a
qualifying income interest for life, and to which an election under this paragraph applies.

Section 2056(b)(7)(B)(v) provides, in part, that an election with respect to any property
shall be made by the executor on the return of tax imposed by § 2001.

Section 2601 imposes a tax on every generation-skipping transfer (within the meaning
of subchapter B) made by a "transferor" to a skip person. Under § 2611(a), the term
"generation-skipping transfer" means a taxable distribution, a taxable termination, and 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 the term "applicable rate" with respect to any generation-
skipping transfer, 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, provides that for purposes of
determining the inclusion ratio, every individual shall be allowed a GST exemption
amount 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 2632(e)(1) provides that any portion of an individual's GST exemption which
has not been allocated within the time prescribed by § 2632(a) shall be deemed to be
allocated as follows: (A) first, to property which is the subject of a direct skip occurring
at such individual's death, and (B) second, to trusts with respect to which such
individual is the transferor and from which a taxable distribution or a taxable termination
might occur at or after such individual's death.

Section 26.2632-1(d)(2) of the Generation-Skipping Transfer Tax Regulations provides,
in part, that a decedent's unused GST exemption is automatically allocated on the due
date for filing Form 706 to the extent not otherwise allocated by the decedent's executor
on or before that date. Unused GST exemption is allocated pro rata, on the basis of the
value of the property as finally determined for purposes of chapter 11, first to direct
skips treated as occurring at the transferor's death. The balance, if any, of unused GST
exemption is allocated pro rata on the basis of the chapter 11 value of the nonexempt
portion of the trust property to trusts with respect to which a taxable termination may
occur or from which a taxable distribution may be made.

Section 2652(a)(1) provides, in part, that for purposes of chapter 13, the term
"transferor" means in the case of any property subject to the tax imposed by chapter 11,
the decedent. An individual shall be treated as transferring any property with respect to
which such individual is the transferor.

Section 2652(a)(3) provides, in part, that in the case of any trust with respect to which a
deduction is allowed to the decedent under § 2056 by reason of subsection (b)(7), 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 (reverse QTIP election).

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(b) provides that an election under § 2652(a)(3) is
made on the return on which the QTIP election is made.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-1 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.

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 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).

Based on the facts submitted and representations made, we conclude that the
requirements of § 301.9100-3 are satisfied. Therefore an extension of time is granted
until 120 days from the date of this letter to make a reverse QTIP election with respect
to the Trust B, and that the automatic allocation rules of § 2632(e)(1) apply to
automatically allocate Decedent's unused GST exemption to Trust B.

The reverse QTIP election should be made on a supplemental Form 706. The
supplemental Form 706 should be filed with the Cincinnati Service Center at the
following address: Internal Revenue Service Center - Stop 82, Cincinnati, OH 45999. A
copy of this letter should be attached to the supplemental Form 706. A copy of this
letter is enclosed for this purpose.

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 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.

                                       Sincerely,

                                       Associate Chief Counsel
                                       (Passthroughs & Special Industries)

                                       Lorraine E. Gardner
                                    By: _________________________
                                       Lorraine E. Gardner
                                       Senior Counsel, Branch 4
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

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


cc: