Estate gets extra time to split a QTIP trust and make a reverse QTIP election

Plain-English summary

A decedent's estate timely made a QTIP election for a trust benefiting the surviving spouse. The estate's law firm did not advise that the trust should be severed into GST-exempt and GST-nonexempt shares, that a reverse QTIP election was needed for the exempt share, or that the decedent's generation-skipping transfer (GST) exemption should be applied. The errors were discovered after the surviving spouse died. The IRS found that the estate had reasonably relied on a qualified tax professional. It granted 120 days to sever the trust and make the reverse QTIP election on a supplemental Form 706. It also ruled that the automatic-allocation rules would apply the decedent's unused GST exemption to the GST-exempt QTIP trust.

Ruling snapshot

• Question: May the estate belatedly sever the QTIP trust, make a reverse QTIP election for the exempt share, and receive automatic GST exemption allocation?
• Outcome: Approved (120-day extension and automatic allocation confirmed)
• Key authorities: IRC §§ 2056(b)(7), 2632(c), 2652(a)(3); Treas. Reg. §§ 26.2652-2, 26.2654-1(b)(1), 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201850010                                              Third Party Communication: None
Release Date: 12/14/2018                                       Date of Communication: Not Applicable
Index Number: 2056.01-00, 2652.01-02,
              9100.00-00                                       Person To Contact:
                                                               --------------------------, ID No. --------------
                                                               Telephone Number:
                                                               ----------------------
--------------------------------------                         Refer Reply To:
---------------------                                          CC:PSI:B04
----------------------------                                   PLR-109713-18
                                                               Date:
                                                               September 17, 2018


         Re: ---------------------------------------



Legend

Decedent                                     =-------------------------------------------------------
Spouse                                       = --------------------------------------------------
Executor                                     = ----------------------------------------------------
Law Firm                                     = ---------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Trust                                        = ---------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
                                                ---------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------- ------
-------------------------------------------------------------------------------------------------------
Share 1                                      = ----------------------------------------
Share 2                                      = -----------------------------
Trust A                                      = -----------------------------------------------
Trust B                                      = ------------------------------------------------------
Attorney                                     = -----------------------
Date 1                                       = ------------------------
Date 2                                       = ----------------------------
Date 3                                       = ----------------------------------


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

This letter responds to your authorized representative’s letter dated March 16, 2018,
and subsequent correspondence, requesting an extension of time under § 301.9100-1
and § 301.9100-3 of the Procedure and Administration Regulations to sever a qualified


terminable interest property (QTIP) trust into two trusts, the GST Non-Exempt QTIP
Trust and the GST Exempt QTIP Trust. You further request an extension of time to
make a reverse QTIP election under § 2652(a)(3) of the Internal Revenue Code with
respect to the GST Exempt QTIP Trust, and apply the automatic allocation rules to
allocate Decedent’s Generation-Skipping Transfer (GST) exemption to the GST Exempt
QTIP Trust.

Decedent executed Trust on Date 1. Decedent died on Date 2, survived by Spouse.
Article FIFTH of Trust provides that if Spouse survives Decedent, the trustee is to divide
Trust into two shares to be administered as two separate trusts: Share 1 and Share 2.
Share 2 is funded with all assets remaining after the funding of Share 1. Share 2 is a
QTIP Trust.

Article SEVENTH of Trust provides that if the property allocated to Share 2 exceeds
Decedent’s available GST tax exemption, the trustee is to establish two trusts, Trust A,
a GST Exempt QTIP Trust and Trust B, a GST Non-Exempt QTIP Trust.

Under Article SEVENTH, Spouse is to receive the net income of Share 2 (consisting of
the GST Exempt QTIP Trust, Trust A, and the GST Non-Exempt QTIP Trust, Trust B) at
least annually. Trustee is to pay to or for the benefit of Spouse as much of the principal
of Trust A and Trust B as the trustee, in the trustee’s discretion, deems necessary for
the health, support, or maintenance of Spouse in the condition to which she has
become accustomed, taking into account Spouse’s income from other sources. In
addition, the trustee shall pay such amounts of the principal of Trust A and Trust B that
Grantor’s wife requests in any calendar year, not to exceed five percent of the value of
the principal of the trusts. The trustee may pay to Spouse such other amounts of the
principal of Trust A and Trust B as the trustee in its absolute and unreviewable
discretion determines. In addition, Spouse may direct that any property that is not fully
productive be converted to productive property.

At Spouse’s death, any undistributed income of both the Share 2 trusts is to be
distributed to Spouse’s estate. The remaining principal of Trust A and Trust B is to be
divided into separate equal shares for Grantor’s then living issue per stirpes.

Upon Decedent’s death, Decedent’s estate retained Law Firm to prepare Decedent’s
Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
Decedent’s Form 706 was timely filed. On Schedule M, the estate made the election
under § 2056(b)(7) (QTIP election) for the QTIP Trust (Share 2). However, the Form
706 did not indicate that the QTIP Trust was to be severed into GST Exempt and GST
Non-Exempt QTIP trusts; nor did it make a reverse QTIP election with respect to the
GST Exempt QTIP Trust. Accordingly, none of Decedent’s GST exemption was
allocated to any portion of Share 2.


Law Firm did not advise the estate of the need to sever the QTIP Trust, make a reverse
QTIP election or apply Decedent’s GST exemption to the GST Exempt QTIP Trust.
The errors were discovered after Spouse’s death, on Date 3. The Decedent’s estate
requests that we grant the following rulings:

1.    An extension of time to sever QTIP Trust into a GST Exempt QTIP Trust and a
GST Non-Exempt QTIP Trust pursuant to § 26.2654-1(b)(1) of the Generation-Skipping
Transfer Tax Regulations.

2.    An extension of time to make a “reverse” QTIP election under § 2652(a)(3) for
the GST Exempt QTIP Trust; and

3.     The automatic allocation rules of § 2632 apply to the GST Exempt QTIP Trust.

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 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.

Under § 2056(b)(1), no deduction is allowed for an interest passing to the surviving
spouse if, on the lapse of time, on the occurrence of an event or contingency, or on the
failure of an event or contingency to occur, the interest will terminate or fail.

Under § 2056(b)(7)(A), qualified terminable interest property is treated as passing to the
surviving spouse for purposes of § 2056(a) and no part of the property is treated as
passing to any person other than the surviving spouse for purposes of § 2056(b)(1)(A).
Qualified terminable interest property is defined under § 2056(b)(7)(B)(i) as property:
(1) which passes from the decedent to the surviving spouse; (2) in which the surviving
spouse has a qualifying income interest for life; and (3) to which an election under
§ 2056(b)(7)(B)(v) applies.

Section 2056(b)(7)(B)(ii) provides that the surviving spouse has a qualifying income
interest for life if: (I) the surviving spouse is entitled to all the income from the property,
payable annually or at more frequent intervals, or has a usufruct interest for life in the
property; and (II) no person has a power to appoint any part of the property to any
person other than the surviving spouse.


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

Under § 2044, any property in which the decedent had a qualifying income interest for
life and for which a deduction was allowed under § 2056(b)(7) is includible in the
decedent’s gross estate.

Section 2601 imposes a tax on every generation-skipping transfer (GST) made by a
transferor to a skip person. A GST is defined under § 2611(a) as: (1) a taxable
distribution; (2) a taxable termination; and (3) a direct skip.
Under § 2631(a) (as in effect at the time of Decedent’s death), for purposes of
determining the inclusion ratio, every individual is allowed a GST exemption of
$1,000,000 (adjusted for inflation under § 2631(c)) that may be allocated by the
individual (or his executor) to any property with respect to which the individual is the
transferor. Section 2631(b) provides that any allocation under § 2631(a), once made, is
irrevocable.

Section 2632(a)(1) provides that an individual's GST exemption may be allocated 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 return is
required to be filed.

Section 2632(c)(1) provides that any portion of an individual's GST exemption which
has not been allocated within the time prescribed by subsection (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 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 exemption is allocated pro rata (subject to the rules of
§ 26.2642-2(b)), on the basis of the value of the property as finally determined for estate
tax purposes (chapter 11 value), first to direct skips treated as occurring at the
transferor's death. The balance, if any, of unused GST exemption is allocated pro rata
(subject to the rules of § 26.2642-2(b)) 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. However, no
automatic allocation of GST exemption is made to a trust that will have a new transferor
with respect to the entire trust prior to the occurrence of any GST with respect to the
trust.


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 that, in the case of any trust with respect to which a
deduction is allowed under § 2056(b)(7), the estate of the decedent may elect to treat all
of the property in such trust for purposes of chapter 13 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 26.2654-1(b)(1) provides, in part, that the severance of a trust that is included in
the transferor's gross estate (or created under the transferor's will) into two or more
trusts is recognized for purposes of chapter 13 if the governing instrument does not
require or otherwise direct severance but the trust is severed pursuant to discretionary
authority granted either under the governing instrument or under local law; and

(A) The terms of the new trust provide in the aggregate for the same succession
of interests and beneficiaries as provided in the original trust;

(B) The severance occurs (or a reformation proceeding, if required, is commenced) prior
to the date prescribed for filing the Federal estate tax return (including extensions
actually granted) for the estate of the transferor; and

(C)(1) The new trusts are severed on a fractional basis. If severed on a fractional basis,
the separate trusts need not be funded with a pro rata portion of each asset held by the
undivided trust. The trusts may be funded on a nonpro rata basis provided funding is
based on either the fair market value of the assets on the date of funding or in a manner
that fairly reflects the net appreciation or depreciation in the value of the assets
measured from the valuation date to the date of funding.

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 six 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, 2001-34
I.R.B. 189, 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 has
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.

Based on the facts submitted and representations made, we conclude that the
standards of §§ 301.9100-1 and 301.9100-3 have been met. Therefore, an extension of
time is granted until 120 days from the date of this letter to sever Share 2 (the QTIP
Trust) into a GST Exempt QTIP Trust and a GST Non-Exempt QTIP Trust and to make
a reverse QTIP election with respect to the GST Exempt QTIP Trust. Finally, we rule
that the automatic allocation rules of § 2632(c) (as in effect on Date 2) will automatically
allocate Decedent’s unused GST exemption to the GST Exempt QTIP Trust.

The reverse QTIP election should be made on a supplemental Form 706 (United States
Estate (and Generation-Skipping Transfer) Tax Return). The supplemental Form 706
should be filed on behalf of Decedent's estate with the Internal Revenue Service Center,
Cincinnati, OH 45999. A copy of this letter should be attached.

Except as specifically ruled herein, we express no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.

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.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) 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.




                                           Sincerely,

                                           Associate Chief Counsel
                                           Passthroughs & Special Industries

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


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


CC: