Late reverse-QTIP election allowed so the deceased's GST exemption can shelter the marital trust

Plain-English summary

When a marital trust qualifies for the estate-tax marital deduction under the QTIP rules, the surviving spouse (not the deceased) would normally be treated as the "transferor" for generation-skipping transfer (GST) tax purposes, which wastes the deceased spouse's GST exemption on that trust. A "reverse QTIP election" under § 2652(a)(3) fixes this by keeping the deceased as the transferor, so the deceased's GST exemption can shelter the trust for gifts that skip a generation (for example, to grandchildren). Here the will directed the trustee to split the marital trust into GST-exempt and GST-non-exempt shares and expressed the decedent's wish to make a reverse QTIP election, but the drafting attorney failed to file the needed Schedule R with the estate tax return, so no reverse QTIP election or GST-exemption allocation was made. The estate asked the IRS for an extension under the § 301.9100-3 relief rules. The IRS granted 120 days to make the reverse QTIP election on a supplemental Form 706, finding the estate reasonably relied on its attorney, so the decedent's GST exemption will be automatically allocated to the GST-exempt marital trust.

Ruling snapshot

• Question: May the estate get an extension of time to make a late reverse QTIP election under § 2652(a)(3) for the GST-exempt marital trust?
• Outcome: Approved (120-day extension granted)
• Key authorities: IRC §§ 2652(a)(3), 2056(b)(7), 2631, 2632; Treas. Reg. §§ 26.2652-2, 26.2654-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202202007 Third Party Communication: None
Release Date: 1/14/2022 Date of Communication: Not Applicable
Index Number: 2652.01-00, 2652.01-02,
2632.03-00, 2654.00-00, Person To Contact:
9100.00-00 ----------------, ID No. -----------------
Telephone Number:
---------------------------------------------------------- --------------------
------------------------ Refer Reply To:
----------------------- CC:PSI:4
------------------------------ PLR-109807-21
Date:
October 20, 2021
Re: ----------------------------------------------

Legend

Decedent = -----------------------------------------------------------------------------
-------------------------
Date ---------------------------
Spouse = -----------------------------------------------------------------------------
-------------------------
Trust = -----------------------------------------------------------------------------
------------------------------------------------------
Marital Trust = -----------------------------------------------------------------------------
------------------------
Credit Shelter Trust = -----------------------------------------------------------------------------
------------------------
GST Exempt Marital = -----------------------------------------------------------------------------
Trust ------------------------
GST Non-Exempt -----------------------------------------------------------------------------
Marital Trust -----------------------
Attorney = ------------------------
y = -------------
z = ------------

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

This letter responds to a letter dated February 25, 2021, and subsequent
correspondence, submitted on behalf of Decedent’s estate, requesting an extension of
time pursuant to § 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 (Code).
PLR-109807-21 2

The facts and representations submitted are as follows:

Decedent died on Date survived by Spouse. Under the terms of Decedent’s will, the
residue of Decedent’s probate estate passes to Trust. Trust, a revocable living trust,
was established by Decedent, as grantor and trustee, during Decedent’s lifetime. Trust
became irrevocable on Date.

After distributing the specific bequests provided for in Article 2-2 of Trust, Section 2-3.1
of Trust directs the trustee to divide the remaining trust estate into two separate trusts –
Marital Trust and Credit Shelter Trust.

Article 2-4 of Trust directs the trustee to divide Marital Trust into two separate trusts –
GST Exempt Marital Trust and GST Non-Exempt Marital Trust – provided there is GST
exemption remaining after allocating GST exemption to Credit Shelter Trust. Article 2-4
of Trust also directs the trustee to allocate to GST Exempt Marital Trust a portion of the
trust estate equal to Decedent’s GST exemption remaining after allocation of GST
exemption to Credit Shelter Trust. Article 2-4 of Trust provides that it is Decedent’s
desire that the trustee make a reverse QTIP election under § 2652(a)(3) with respect to
GST Exempt Marital Trust and allocate Decedent’s GST exemption to GST Exempt
Marital Trust. Article 2-4 further provides that the language of Article 2-4 shall be
interpreted in a manner which complies with § 26.2654-1 of the Generation-Skipping
Transfer Tax Regulations.

Section 2-4.1 of Trust directs the trustee to distribute the net income of GST Exempt
Marital Trust and GST Non-Exempt Marital Trust semiannually or at more frequent
intervals to Spouse. Section 2-4.2 of Trust provides that the trustee may distribute the
principal of GST Exempt Marital Trust and GST Non-Exempt Marital Trust to Spouse for
Spouse’s support; however, the trustee is prohibited from distributing principal from
GST Exempt Marital Trust until GST Non-Exempt Marital Trust is exhausted.

Sections 2-4.5, 2-4.6, and 4-1.3(d) of Trust provide that upon Spouse’s death, any
accrued or undistributed income passes to Spouse’s estate, and subject to Spouse’s
testamentary limited power of appointment over GST Exempt Marital Trust and
Spouse’s testamentary general power of appointment over GST Non-Exempt Marital
Trust, the remaining principal is divided into equal shares for Decedent’s descendants,
by representation. A share for a child of Decedent is distributed outright, and a share
for a more remote descendant is held in trust.

Spouse, as personal representative of Decedent’s estate and trustee of Trust, engaged
Attorney, the drafter of Trust, to properly prepare Decedent’s Form 706, United States
Estate (and Generation-Skipping Transfer) Tax Return. Form 706 was timely filed. On
Schedule M (Bequests to Surviving Spouse), Decedent’s estate made the election
under § 2056(b)(7) to treat the property of Marital Trust as QTIP. Schedule M did not
indicate that Article 2-4 of Trust requires division of Marital Trust into GST Exempt
Marital Trust and GST Non-Exempt Marital Trust. Due to Attorney’s error, no
PLR-109807-21 3

Schedule R (Generation-Skipping Transfer Tax) was filed with Decedent's Form 706,
and Decedent’s estate, therefore, did not make a reverse QTIP election with respect to
GST Exempt Marital Trust or affirmatively allocate Decedent’s available GST
exemption.

Decedent’s estate represents that $y of Decedent’s GST exemption was affirmatively or
automatically allocated to Decedent’s lifetime transfers, leaving $z of GST exemption
available at Decedent’s death. Decedent’s estate further represents that, after GST
exemption is automatically allocated to Credit Shelter Trust, GST exemption is available
to automatically allocate to GST Exempt Marital Trust.

Decedent’s estate requests an extension of time under § 301.9100-3 to make a reverse
QTIP election under § 2652(a)(3) with respect to GST Exempt Marital 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 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, in pertinent part, that no deduction is allowed under
§ 2056(a) 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.

Section 2056(b)(7)(A) provides that, in the case of QTIP, 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 “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 as defined in § 2056(b)(7)(B)(ii); and (III) to which an election
under § 2056(b)(7) applies.

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.
The election, once made, is irrevocable.
PLR-109807-21 4

QTIP is subject to federal gift tax under § 2519 on the date the surviving spouse
disposes of all or part of the qualifying income interest or is subject to federal estate tax
under § 2044 upon the surviving spouse’s death.

Section 2601 imposes a tax on every generation-skipping transfer (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 GST tax is the taxable amount multiplied by
the applicable rate. Section 2641(a) defines “applicable rate” as the product of the
maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

Section 2642(a)(1) defines “inclusion ratio” as the excess (if any) of 1 over the
applicable fraction. Under § 2642(a)(2), the “applicable fraction” is a fraction the
numerator of which is the amount of the GST exemption 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 2631(a) provides that, for purposes of determining the inclusion ratio, every
individual shall be allowed a GST exemption amount which may be allocated by the
individual (or the individual’s 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)(1) provides that any allocation by an individual of GST exemption
under § 2631(a) may be made at any time on or before the date prescribed for filing the
estate tax return for the individual's estate (determined with regard to extensions),
regardless of whether an estate tax return is required to be filed.

Under § 2632(e) and § 26.2632-1(d)(2), an individual's unused GST exemption is
automatically allocated on the due date to the extent not otherwise allocated by the
individual's executor on or before that date. The unused exemption is allocated: (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. 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 that, for GST tax purposes, an individual shall be treated as
transferring any property with respect to which the individual is the transferor. Under
§ 2652(a)(1), the “transferor” is the decedent with respect to any property subject to
federal estate tax and the donor with respect to any property subject to federal gift tax.
PLR-109807-21 5

However, under § 2652(a)(3), in the case of any trust for which a marital deduction is
allowed to the decedent by reason of § 2056(b)(7), the estate of the decedent may elect
to treat all of the property in the trust for GST tax purposes as if the QTIP election had
not been made. The election under § 2652(a)(3) is referred to as a “reverse QTIP
election.” The consequence of a reverse QTIP election is that, for GST tax purposes,
the decedent, not the surviving spouse, is the transferor of the trust for which the QTIP
election is made, and the decedent's GST exemption may be allocated to the 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. Under § 26.2652-2(b), the reverse QTIP election is made on the return
of tax 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 GST tax purposes 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.

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).

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 this case, the terms of Trust direct the severance of Marital Trust into GST Exempt
Marital Trust and GST Non-Exempt Marital Trust. Therefore, under § 26.2654-
1(b)(1)(i), the severance of Marital Trust into GST Exempt Marital Trust and GST
Non-Exempt Marital Trust is recognized for GST tax purposes. As a result of the QTIP
election made on Form 706, and pursuant to § 2519 or § 2044(a), Spouse will become
the transferor of GST Exempt Marital Trust for GST tax purposes prior to the occurrence
PLR-109807-21 6

of any GST, thereby precluding automatic allocation of Decedent’s GST exemption to
GST Exempt Marital Trust. However, if Decedent’s estate is granted an extension of
time to make a reverse QTIP election, Decedent will remain the transferor of GST
Exempt Marital Trust for GST tax purposes, and Decedent’s available GST exemption
will be automatically allocated under § 2632(e).

Based on the facts submitted and the representations made, we conclude that the
requirements of § 301.9100-3 have been satisfied. Therefore, Decedent’s estate is
granted an extension of time of 120 days from the date of this letter to make a reverse
QTIP election with respect to GST Exempt Marital Trust.

The reverse QTIP election should be made on a supplemental Form 706. The
supplemental Form 706 should be filed with the Service Center at the following address:
Internal Revenue Service Center, Attn: E&G, Stop 824G, 7940 Kentucky Drive,
Florence, KY 41042-2915. A copy of this letter should be attached to the supplemental
Form 706.

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.
PLR-109807-21 7

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)



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

Enclosure
Copy for § 6110 purposes

cc: