Estate received 120 days for a reverse QTIP election and trust severance

Plain-English summary

An estate made a QTIP election for a marital trust, but its accountant failed to attach Schedule R, advise the executor to divide the trust into GST-exempt and nonexempt shares, or make a reverse QTIP election. The IRS found that the executor reasonably relied on a qualified tax professional and satisfied the regulatory-extension standard. It gave the estate 120 days to sever the trust and make a reverse QTIP election for the GST-exempt share on a supplemental Form 706. The decedent's unused generation-skipping transfer tax exemption would then be automatically allocated to that share under section 2632(e).

Ruling snapshot

• Question: May the estate sever the QTIP trust late and make a reverse QTIP election for its GST-exempt share?
• Outcome: approved, with 120 days to sever the trust and file the reverse QTIP election
• Key authorities: IRC §§ 2056(b)(7), 2632(e), 2652(a)(3), and 2654; Treas. Reg. §§ 26.2652-2, 26.2654-1(b), and 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201937011                                              Third Party Communication: None
Release Date: 9/13/2019                                        Date of Communication: Not Applicable
Index Number: 2056.00-00, 2056.01-00,
              2632.00-00, 2632.03-00,                          Person To Contact:
              2632.03-00, 2652.00-00,                          ----------------------, ID No. ------------------
              2652.01-00, 2654.00-00,                          Telephone Number:
              9100.00-00                                       --------------------
                                                               Refer Reply To:
---------------------------------------                        CC:PSI:B4
------------------------------                                 PLR-132793-18
--------------------------------------------------             Date:
                                                               April 29, 2019
Re: ------------------------------------




Legend

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

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

This letter responds to your authorized representative’s letter dated October 9, 2018. In
that letter, your authorized representative requested an extension of time under
§ 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 make an election to treat a marital trust as two separate trusts
under § 26.2652-2(c) of the Generation-Skipping Transfer Tax Regulations.

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

Article 7(A)(1) of Trust provides that upon the death of the first to die of Decedent or
Spouse, the trustee shall divide Trust into a surviving trustor’s share and a decedent’s
PLR-132793-18                                  2

share. Article 7(A)(1) further directs that the decedent’s share shall consist of the
decedent’s separate property, his one-half interest in community property, and his one-
half interest in quasi-community property.

Article 7(A)(3) directs the trustee to retain the surviving trustor’s share in a separate
trust (the Surviving Trustor’s Trust).

Article 7(A)(3) directs the trustee to further divide the property in the decedent’s share
into three parts: the tangible personal property share, the marital deduction share, and
the by-pass share. Article 7(A)(3)(a) directs the trustee to distribute the tangible
personal property share to the Surviving Trustor’s Trust. Article 7(A)(3)(b) defines the
marital deduction share, directs the trustee to distribute the marital deduction share
between a martial trust (the QTIP Trust), and the Surviving Trustor’s Trust in the
amounts described in Article 7(A)(3)(b). Article 7(A)(3)(c) directs the trustee to
distribute to a by-pass trust (the By-pass Trust) the property remaining in the decedent’s
share after distribution of the tangible personal property share and marital deduction
share.

Article 9 provides the terms of the QTIP Trust. Article 9 directs the trustee to pay to or
apply for the benefit of the surviving spouse all of the net income quarter-annually or at
more frequently intervals. The trustee shall also pay to or apply for the benefit of the
surviving spouse so much of the principal of the QTIP Trust for the survivor’s health,
maintenance, support and education. In addition, the surviving spouse has the right to
occupy without payment of rent any real property in the QTIP Trust. Moreover, the
surviving spouse has a testamentary special power of appointment over the QTIP Trust.

Article 5(G) directs the trustee to divide any trust with a GST transfer tax inclusion ratio
other than zero or one into exempt and nonexempt portions to be held as separate
trusts. In addition, Article 14(A)(6)(c) provides that the trustee may divide any trust into
two or more separate trusts and, as an example, provides that the trustee may divide
any trust into two separate trusts in order that the GST transfer tax inclusion ratio for
each such trust shall be either zero or one.

Article 4(C) provides, in part, that upon the death of the first to die of Decedent and
Spouse, the survivor may amend or revoke the Surviving Trustor’s Trust in whole or in
part, but any and all other trusts created under Trust shall be irrevocable.

Spouse acted as executor of Decedent’s estate and trustee of Trust. Spouse relied on
Accountant to prepare and provide advice regarding Decedent’s Form 706, United
States Estate (and Generation-Skipping Transfer) Tax Return. Spouse made an
election to have the QTIP Trust treated as qualified terminable interest property under
PLR-132793-18                                3

§ 2056(b)(7). However, Accountant failed to attach a Schedule R to Decedent’s
Form 706 and failed to advise Spouse to divide the QTIP Trust into a GST exempt QTIP
trust and a GST nonexempt QTIP Trust. Thus, Decedent’s estate did not make a
reverse QTIP election and did not affirmatively allocate Decedent’s GST tax exemption.
The successor trustee of Trust discovered these errors upon review of Spouse’s Form

706. It is represented that Decedent has sufficient GST exemption to allocate to the
GST exempt QTIP trust.

You have requested:

1. An extension of time under § 301.9100-1 and 301.9100-3 to sever the QTIP Trust
into a GST exempt QTIP trust and a GST nonexempt QTIP trust pursuant to § 26.2654-
1(b) of the GST Tax Regulations.

2. An extension of time under § 301.9100-1 and 301.9100-3 to make a “reverse” QTIP
election under § 2652(a)(3).

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 2044 provides, in part, that the value of the gross estate shall include the value
of any property for which a deduction was allowed with respect to the transfer of such
property to the decedent under § 2056(b)(7) in which the decedent had a qualifying
income interest for life.

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 than an adequate and full 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
PLR-132793-18                                   4

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 (even if such deduction is not disallowed under
subparagraphs (A) and (B)) -- (C) if such interest is to be acquired for the surviving
spouse, pursuant to directions of the decedent, by his executor or by the trustee of a
trust.

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: (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)
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.

Section 20.2056(b)-7(b)(4)(i) of the Estate Tax Regulations 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.

Section 2601 imposes a tax on every generation-skipping transfer. Section 2611(a)
provides that the term “generation-skipping transfer” means: (1) a taxable distribution;
(2) a taxable termination; and (3) a direct skip.

Section 2602 provides that the amount of the GST tax is determined by multiplying the
taxable amount by the applicable rate. Section 2641(a) provides that the term
PLR-132793-18                                5

“applicable rate” means, with respect to any GST transfer, the product of the maximum
federal estate tax rate and the inclusion ratio with respect to the transfer.

Section 2631(a), as in effect on Decedent's date of death, provides that, for purposes of
determining the inclusion ratio, every individual shall be allowed a GST exemption of
$1,000,000 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, 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, in general, 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
that a decedent's unused GST exemption is automatically allocated on the due date for
filing the Form 706, or Form 706NA, to the extent not otherwise allocated by the
decedent's executor on or before that date. Unused GST 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 purposes of chapter 11 (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. 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. The automatic allocation is irrevocable.

Section 2642(a)(1) provides that, generally, the inclusion ratio with respect to any
property transferred in a GST is the excess of one over the applicable fraction
determined for the trust. Section 2642(a)(2) provides that, in general, the applicable
fraction is a fraction the numerator of which is the amount of the GST exemption
PLR-132793-18                                 6

allocated to the trust and the denominator of which is the value of the property
transferred to the trust, reduced by the sum of any federal estate tax or state death tax
actually recovered from the trust attributable to such property, and any charitable
deduction allowed under § 2055 or 2522 with respect to such property.

Section 2652(a)(1) provides that for purposes of chapter 13, the term “transferor”
means: (A) in the case of any property subject to the tax imposed by chapter 11, the
decedent; and (B) in the case of any property subject to the tax imposed by chapter 12,
the donor. An individual shall be treated as transferring any property with respect to
which such individual is the transferor.

Section 2652(a)(3) provides, in pertinent part, that in the case of any trust with respect
to which a deduction is allowed to the decedent under § 2056(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 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 trust is severed pursuant to a
direction in the governing instrument providing that the trust is to be divided upon the
death of the transferor and the terms of the new trusts provide in the aggregate for the
same succession of interests and beneficiaries as are provided in the original
instrument and the severance occurs prior to the date prescribed for filing the federal
estate tax return (including extensions actually granted) for the estate of the transferor
and the new trusts are severed on a fractional basis.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-2 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).
PLR-132793-18                                 7

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 representations made, we conclude that the
requirements of § 301.9100-3 are satisfied. Therefore, Decedent’s estate is granted an
extension of time of 120 days from the date of this letter to sever the QTIP Trust into a
GST exempt QTIP trust and a GST nonexempt QTIP trust and to make a reverse QTIP
election with respect to the GST exempt QTIP trust. Further, the automatic allocation
rules of § 2632(e) apply to 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. 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 be
attached to the supplemental Form 706. A copy is enclosed for this purpose.

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.

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.
PLR-132793-18                                8

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

                                      Sincerely,

                                      Associate Chief Counsel
                                      (Passthroughs & Special Industries)



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

Enclosures (2)

      Copy of this letter
      Copy for § 6110 purposes



cc: