Splitting a QTIP marital trust in two, then disclaiming one, is a gift but not a taxable sale and keeps QTIP status

Plain-English summary

After a decedent's death, the marital share of his revocable trust was treated as qualified terminable interest property (QTIP), giving his surviving spouse a lifetime income interest. The spouse, as trustee, proposed to divide that marital share on a fractional basis into two identical trusts (Trust A and Trust B) and then disclaim his interest in Trust A, so Trust A would pass to trusts for the decedent's children. The spouse asked for six rulings, and the IRS granted all of them. It ruled that the fractional division does not cause anyone to recognize income or gain under section 61 or section 1001; that both new trusts remain QTIP trusts under section 2056(b)(7); that the disclaimer (which is not a qualified disclaimer) is treated as the spouse making a gift of his income interest under section 2511 and of the rest of Trust A under section 2519; that it does not cause Trust B to be a gift; that the section 2519 amount is not pulled back into the spouse's gross estate under section 2044 because of section 2044(b)(2); and that the disclaimer does not zero out the value of the spouse's Trust B interest under section 2702. It matters because it maps out how to restructure a marital trust to move assets to the next generation and the transfer-tax cost (a current gift) of doing it by disclaimer.

Ruling snapshot

• Question: What are the income, gift, and estate tax consequences of dividing a QTIP marital trust into two and disclaiming the surviving spouse's interest in one of them?
• Outcome: Approved (all six requested rulings granted)
• Key authorities: IRC §§ 61, 1001, 2056(b)(7), 2511, 2518, 2519, 2044, 2702; Cottage Savings Ass'n v. Commissioner, 499 U.S. 554 (1991)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202146001 Third Party Communication: None
Release Date: 11/19/2021 Date of Communication: Not Applicable
Index Number: 2501.00-00, 2511.00-00,
2519.00-00, 2702.00-00, Person To Contact:
2056.07-00, 2044.00-00, -------------------------- ID No. -----------------
1001.00-00, 61.00-00 Telephone Number:
---------------------
----------------------------- Refer Reply To:
------------------------- CC:PSI:B04
-------------------------- PLR-102825-21
Date:
August 09, 2021

Legend

Decedent ---------------
Spouse -------------------------------------------
Marital Share ------------------------------------------------------------------------
Trust -----------------------
Date 1 ----------------------
Date 2 ------------------
Date 3 -----------------------
a ---------------
State --------
State Statute -----------------------------------------------------

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

    This letter responds to your authorized representative’s letter dated

January 26, 2021, and subsequent correspondence, requesting income, estate, and gift
tax rulings with respect to the proposed division of Trust.

    The facts and representations submitted are summarized as follows:

   Decedent established Trust, a revocable trust, on Date 1. Trust was most

recently restated on Date 2. Trust is governed under the law of State.

  Article First of Trust provides, in relevant part, that Trust is to be irrevocable upon

Decedent’s death. Decedent is to be the initial trustee of Trust, and if Decedent is
unable or unwilling to serve (or continue to serve) as trustee, Spouse, Decedent’s
spouse, is to serve as trustee.
PLR-102825-21 2

   Article Second provides, in relevant part, that so long as Decedent is living, the

trustee has full and absolute discretion to distribute Trust income to Decedent.

   Article Third provides, in relevant part, that at the death of Decedent, Trust is to

continue but the trustee is to divide the Trust assets into two shares. One share, known
as the By-Pass Share, is to be funded with assets equal in value to the applicable
exclusion amount, less lifetime gifts and renunciations chargeable against the exclusion.
The trustee of the By-Pass Share is to pay to or expend on behalf of Spouse, the net
income derived from the By-Pass Share for Spouse’s health, education, maintenance,
and support, in accordance with his standard of living and financial resources. In the
event the net income from the By-Pass Share is insufficient to meet that standard, the
trustee is to have the power to encroach upon the corpus of the By-Pass Share to an
extent necessary for Spouse’s health, education, maintenance, and support. By-Pass
Share is to terminate upon Spouse’s death.

   Article Fourth provides, in relevant part, that at the death of Decedent, after

funding the By-Pass Share, the remainder of the assets constituting Trust property is to
fund Marital Share. Marital Share is for the exclusive benefit of Spouse and is
irrevocable. Spouse is to serve as initial trustee of Marital Share. The trustee of Marital
Share is to pay or expend on behalf of Spouse, at least annually or at more frequent
intervals, all of the income derived from Marital Share. Spouse is granted the right to
demand that the trustee invest in income producing assets with respect to Marital
Share. Marital Share is to terminate at the death of Spouse.

   Article Fifth provides, in relevant part, that at the death of Decedent and Spouse,

the trustee is to distribute the remaining assets of the By-Pass Share and Marital Share
equally to the trusts created for the benefit of Decedent’s children.

  Decedent died on Date 3, survived by Spouse and two children. Decedent’s

executor elected to treat Marital Share as qualified terminable interest property (QTIP)
under § 2056(b)(7) of the Internal Revenue Code.

   Spouse, as trustee of Marital Share, seeks to divide Marital Share into two

separate, but identical, trusts, Trust A and Trust B. Trust A would be funded from
Marital Share with assets having a net fair market value on the date of division equal in
value to $a, the basic exclusion amount under § 2010(c)(3) for the current year, and
Trust B would be funded with all remaining cash and property of Marital Share.

    The trustee, Spouse, and the beneficiaries of the trusts created for the benefit of

Decedent’s children agree that such a division will not impair the rights of any
beneficiary or adversely affect achievement of the purposes of Marital Share. The
division of the assets of Marital Share will be made on a pro-rata, fractional basis, by
identifying the assets and liabilities passing to each separate trust. Further, the
interests will continue to be held under identical terms in the assets of Marital Share
through Trust A and Trust B before and after the division.
PLR-102825-21 3

   Following the division of Marital Share into Trust A and Trust B, Spouse will

disclaim his interest in Trust A. As a consequence of Spouse’s disclaimer, the assets in
Trust A will be distributed to the trusts created for the benefit of Decedent’s children,
pursuant to Article Fifth of Trust.

    State Statute provides, in relevant part, that a trustee may, unless expressly

prohibited by the terms of the instrument establishing the trust, divide a trust into two or
more separate trusts without a judicial proceeding if the result does not impair the rights
of any beneficiary or adversely affect achievement of the purposes of the original trust.
The trustee may make a division under this subsection by giving written notice of the
division to each beneficiary who might then be entitled to receive distributions from the
trust and by executing a written instrument stating that the trust has been divided
pursuant to this section and that the notice requirements of this subsection have been
satisfied. A trustee, in the written instrument dividing a trust, is to allocate trust property
among the separate trusts on a fractional basis, by identifying the assets and liabilities
passing to each separate trust.

    You have requested the following rulings:

1. The division of Marital Share into Trust A and Trust B on a fractional basis will
   not cause Marital Share, Trust A, Trust B or any beneficiary of these three
   trusts to recognize ordinary income or loss, or capital gain or loss, under § 61
   or § 1001.

2. After the division of Marital Share into Trust A and Trust B, Trust A and
   Trust B will continue to be QTIP trusts under § 2056(b)(7).

3. Upon Spouse’s disclaimer of his interest in Trust A, Spouse will be treated as
   having made a gift of his qualifying income interest in Trust A under § 2511,
   and as having made a gift of all of the interests in Trust A other than the
   qualifying income interest under § 2519.

4. Spouse’s disclaimer of his interest in Trust A will not cause any property in
   Trust B to be treated as a gift by Spouse under § 2519.

5. The value of the property in Trust A treated as transferred under § 2519 will
   not be included in Spouse’s gross estate under § 2044(a) because of the
   application of § 2044(b)(2).

6. Spouse’s disclaimer of his interest in Trust A will not cause his interest in
   Trust B to be valued at zero under § 2702.
   Ruling 1
   PLR-102825-21 4

   Section 61(a)(3) provides that gross income includes gains derived from dealings
   in property.

   Section 1001(a) provides that the gain from the sale or other disposition of
   property shall be the excess of the amount realized therefrom over the adjusted basis
   provided in § 1011 for determining gain, and the loss shall be the excess of the adjusted
   basis provided in § 1011 for determining loss over the amount realized.

   Section 1001(b) states that the amount realized from the sale or other disposition
   of property shall be the sum of any money received plus the fair market value of the
   property (other than money) received. Under § 1001(c), except as otherwise provided
   in subtitle A, the entire amount of gain or loss, determined under § 1001, on the sale or
   exchange of property shall be recognized.

   Section 1.1001-1(a) of the Income Tax Regulations provides that the gain or loss
   realized from the conversion of property into cash, or from the exchange of property for
   other property differing materially either in kind or in extent, is treated as income or loss
   sustained.

   Section 1.1001-1(h)(1) provides that the severance of a trust is not an exchange
   of property for other property differing materially either in kind or in extent if -- (i) an
   applicable state statute or the governing instrument authorizes or directs the trustee to
   sever the trust, and (ii) any non-pro rata funding of the separate trusts resulting from the
   severance whether mandatory or in the discretion of the trustee, is authorized by an
   applicable state statute or governing instrument.

   An exchange of property results in the realization of gain only if the properties
   

   exchanged materially differ. Cottage Savings Association v. Commissioner, 499 U.S.
   554 (1991). A material difference exists when the exchanged properties embody legal
   entitlements “different in kind or extent” or if they confer “different rights and powers.”
   Id. at 565.

   Rev. Rul. 56-437, 1956-2 C.B. 507, provides that a partition of jointly owned
   property pursuant to state law is not a sale or other disposition of property where the
   co-owners of the joint property sever their joint interests, but do not acquire a new or
   additional interest as a result of the transaction. Thus, neither gain nor loss is realized
   on a partition.

   Accordingly, based on the facts presented and the representations made, we
   conclude that the division of Marital Share into Trust A and Trust B on a fractional basis
   PLR-102825-21 5

will not cause Marital Share, Trust A, Trust B or any beneficiary of these three trusts to
recognize ordinary income or loss, or capital gain or loss, under § 61 or § 1001.1

Ruling 2

 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, except as limited by § 2056(b), the value of the

taxable estate is to 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), a marital deduction is not allowable for an interest in

property passing to the surviving spouse that is a "terminable interest." An interest
passing to the surviving spouse is a terminable interest if it will terminate or fail on the
lapse of time or on the occurrence of an event or contingency, or on the failure of an
event or contingency to occur and, on termination, an interest in the property passes to
someone other than the surviving spouse.

    Section 2056(b)(7) provides an exception to the terminable interest rule in the

case of qualified terminable interest property (QTIP). Under § 2056(b)(7), 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). Section 2056(b)(7)(B)(i) provides
that the term "qualified terminable interest property" means 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)(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 and (II) no person has a power
to appoint any part of the property to any person other than the surviving spouse.

    In this case, after the division of Marital Share into Trust A and Trust B, Spouse

will continue to be entitled to all the income from the property, payable annually or at
more frequent intervals in the trusts. Further, no person, other than Spouse, will have a
power to appoint any part of the property in the trusts to any person other than Spouse.
Accordingly, Spouse will continue to have a qualifying income interest in the trusts.
Based upon the facts presented and representations made, we conclude that after the

1No ruling has been requested concerning the income tax consequences of Spouse’s

proposed disclaimer of an income interest in Trust A, so we have not opined on the
same.
PLR-102825-21 6

division of Marital Share into Trust A and Trust B, Trust A and Trust B will continue to be
QTIP trusts under § 2056(b)(7).

Rulings 3 and 4

  Section 2501 imposes a tax on the transfer of property by gift. Section 2511

provides that the gift tax imposed by § 2501 shall apply whether the transfer is in trust or
otherwise, whether the gift is direct or indirect, and whether the property is real or
personal, tangible or intangible.

   Section 25.2511-2(a) of the Gift Tax Regulations provides that the gift tax is a

primary and personal liability of the donor, is an excise upon his act of making the
transfer, is measured by the value of the property passing from the donor, and attaches
regardless of the fact that the identity of the donee may not then be known or
ascertainable.

   Section 2518 provides that, if a person makes a qualified disclaimer with respect

to any interest in property, the disclaimed interest will be treated for gift, estate, and
generation-skipping transfer tax purposes as if the interest had never been transferred
to such person.

   Section 2518(b) provides that a “qualified disclaimer” means an irrevocable and

unqualified refusal by a person to accept an interest in property, but only if: (1) the
disclaimer is in writing; (2) the disclaimer is received by the transferor of the interest, his
legal representative, or the holder of the legal title to the property to which the interest
relates not later than the date which is nine months after the later of (A) the date on
which the transfer creating the interest in the person is made, or (B) the day on which
the person attains age 21; (3) the person has not accepted the interest or any of its
benefits; and (4) as a result of the disclaimer, the interest passes without any direction
on the part of the person making the disclaimer and passes either to the decedent's
spouse or to a person other than the person making the disclaimer.

   Section 2519 provides that for gift tax purposes any disposition by the surviving

spouse of all or part of a qualifying income interest for life in any property for which a
deduction was allowed under § 2056(b)(7) is treated as a transfer by the surviving
spouse of all interests in the property other than the qualifying income interest. The
transfer of the qualifying income interest of the spouse is a transfer by the spouse
subject to gift tax under § 2511. Section 25.2519-1(a).

    Section 25.2519-1(c)(1) provides that the amount treated as a transfer under

§ 2519 upon a disposition of all or part of a qualifying income interest for life in qualified
terminable interest property is equal to the fair market value of the entire property
subject to the qualifying income interest, determined on the date of the disposition
(including any accumulated income and not reduced by any amount excluded from total
gifts under § 2503(b) with respect to the transfer creating the interest), less the value of
PLR-102825-21 7

the qualifying income interest in the property on the date of the disposition. The gift tax
consequences of the disposition of the qualifying income interest are determined
separately under § 25.2511-2.

   In this case, the trustee will divide Marital Share into Trust A and Trust B. At the

moment of division, Spouse will retain a qualifying income interest in both trusts. After
the division of Marital Share, each separate trust will be a QTIP trust under § 2056(b)(7)
and the division will not be treated as a disposition under § 2519.

   Spouse’s disclaimer is not a qualified disclaimer for purposes of § 2518.

Accordingly, based on the facts submitted and the representations made, Spouse’s
disclaimer of his income interest in Trust A will be treated as a disposition of his
qualifying income interest in Trust A. Therefore, Spouse will make a gift of his qualifying
income interest in Trust A under § 2511, and will make a gift of all of the interests in
Trust A other than the qualifying income interest under § 2519.

   We also conclude, based on the facts presented and representations made, that

Spouse’s disclaimer of his interest in Trust A will not cause any property in Trust B to be
treated as a gift by Spouse under § 2519.

Ruling 5

   Section 2044(a) provides that the value of the gross estate shall include the

value of any property to which § 2044 applies in which the decedent had a qualifying
income interest for life. Section 2044(b) provides that § 2044 applies to any property if
(1) a deduction was allowed with respect to the transfer of such property to the
decedent under § 2056(b)(7) or § 2523(f), and (2) § 2519 did not apply with respect to a
disposition by the decedent of part or all of such property.

    As stated above, Spouse’s disclaimer of his interest in Trust A will result in

Spouse making a gift, under § 2519, of the entire fair market value of the assets in Trust
A, less the value of the qualifying income interest. Section 2044(b)(2) provides that
§ 2044(a) does not apply to any property if § 2519 applies to the disposition of part or all
of that property prior to Spouse's death. Accordingly, based on the facts submitted and
the representations made, we conclude that the value of the property in Trust A treated
as transferred under § 2519 will not be included in Spouse’s gross estate under §
2044(a) because of the application of § 2044(b)(2).

Ruling 6

    Section 2702(a)(1) provides that solely for the purpose of determining whether a

transfer of an interest in trust to (or for the benefit of) a member of the transferor's family
is a gift (and the value of such transfer), the value of any interest in such trust retained
by the transferor or any applicable family member (as defined in § 2701(e)(2)) shall be
determined as provided in § 2702(a)(2).
PLR-102825-21 8

    Section 2702(a)(2) provides that the value of any retained interest which is not a

qualified interest (as defined in § 2702(b)) shall be treated as being zero and the value
of any retained interest that is a qualified interest (as defined in § 2702(b)) shall be
determined under § 7520. Under § 25.2702-2(a)(3), the term “retained” means held by
the same individual both before and after the transfer in trust.

    In this case, Spouse will disclaim his income interest in Trust A. We concluded

earlier that the disclaimer will not cause any property in Trust B to be treated as a gift by
Spouse under § 2519. Accordingly, based upon the facts presented and
representations made, we conclude that Spouse’s disclaimer of his interest in Trust A
will not cause his interest in Trust B to be valued at zero under § 2702.

  In accordance with the Power of Attorney on file with this office, we have sent a

copy of this letter 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.

  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.

                               Sincerely,



                               __Lorraine E. Gardner_______________
                               Lorraine E. Gardner
                               Senior Counsel, Branch 4
                               Office of the Associate Chief Counsel
                               (Passthroughs and Special Industries)

   Enclosure:
         Copy for § 6110 purposes

cc: