Dividing a marital QTIP trust and disclaiming half is tax-free income-wise and produces a controlled gift, with no surprise estate inclusion

Plain-English summary

A surviving spouse was the lifetime income beneficiary of a "QTIP" marital trust (property that qualified for the estate tax marital deduction when the first spouse died and that will normally be taxed in the surviving spouse's estate). The family wanted to split the marital trust into two trusts, size Trust 1 to match the spouse's remaining lifetime gift tax exclusion, and then have the spouse disclaim her income interest in Trust 1 so its assets pass now to grandchildren, charities, and the children. The spouse asked the IRS to confirm the tax consequences, and the IRS agreed on all six points. Because state law and the trust let the trustees divide the trust on a non-pro-rata basis, the split does not trigger income or capital gain under Sections 61 and 1001, and both new trusts remain QTIP trusts. The disclaimer is not a "qualified disclaimer," so it counts as the spouse disposing of her income interest: she makes a gift of the income interest under Section 2511 and a gift of the rest of Trust 1 under Section 2519. Crucially, that disclaimer of Trust 1 does not spill over to make Trust 2 a gift, the Trust 1 property taxed as a Section 2519 gift will not also be pulled back into the spouse's estate under Section 2044 (thanks to Section 2044(b)(2)), and it does not cause her retained interest in Trust 2 to be valued at zero under the Section 2702 anti-abuse rule. In plain terms, the plan lets the family move value to the next generation now using the spouse's gift exclusion, without an income tax hit and without double estate-and-gift taxation.

Ruling snapshot

• Question: Will dividing a QTIP marital trust and having the spouse disclaim her interest in one half be free of income tax, keep QTIP status, produce only the intended Section 2519 gift, and avoid estate inclusion and the Section 2702 zero-valuation rule?
• Outcome: approved (all six requested rulings granted in the taxpayer's favor)
• Key authorities: IRC §§ 61, 1001; Treas. Reg. § 1.1001-1(h); IRC § 2056(b)(7); IRC §§ 2511, 2518, 2519; IRC § 2044(b)(2); IRC § 2702

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202504006                                              Third Party Communication: None
 Release Date: 1/24/2025                                        Date of Communication: Not Applicable
 Index Number: 61.00-00, 1001.00-00,
               2056.07-00, 2519.00-00,                          Person To Contact:
               2702.00-00                                       ---------------, ID No. -----------------
                                                                Telephone Number:
 ----------------------                                         --------------------
 ------------------------------                                 Refer Reply To:
 -----------------------------                                  CC:PSI:B04
                                                                PLR-108779-24
                                                                Date:
                                                                October 25, 2024
          In Re: ----------------------




LEGEND

Decedent                   =------------------------
Spouse                     = -------------------------------------------------
Child 1                    = ------------------------------
Child 2                    =--------------------------
Grandchild 1               =-----------------
Grandchild 2               = ------------------------
Individual                 = --------------------------
Trust                      = ----------------------------------------------
Marital Trust              =----------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Date 1                     = -------------------------
Date 2                     =---------------------------
Date 3                     =-------------------------
Date 4                     = -------------------------
Date 5                     =--------------------------
Date 6                     = -----------------------
Date 7                     = -----------------------
Date 8                     =----------------------
a                          =--------------
b                          =------------
Charity 1                  =--------------------------
Charity 2                  =-----------------------
State 1                    =------------
State 2                    =-----------
State 1 Court              =----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
PLR-108779-24                                         2

Statute 1              =-----------------------------------------------------------
Statute 2              =------------------------------------------------------------

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

       This letter responds to your authorized representative’s letter dated May 3, 2024,
requesting income, estate, and gift tax rulings with respect to the proposed division of a
trust.

        The facts and representations submitted are summarized as follows:

       Decedent established Trust, a revocable trust, on Date 1, and amended and
restated Trust on Date 2. Trust became irrevocable upon Decedent’s death on Date 3.
Decedent was survived by Spouse and Spouse’s children, Child 1 and Child 2.

        Pursuant to Article II, Paragraph B.4. of Trust, upon Decedent’s death, and after
certain specific bequests, the remaining trust estate was to be divided into two separate
trusts, Marital Trust and Decedent’s Trust. This letter pertains to Marital Trust only.
The current trustees of Marital Trust are Child 2 and Individual. Marital Trust is currently
sitused in, and governed by, the law of State 1.

       Article II, Paragraph C. provides the terms of Marital Trust. Under Article II,
Paragraph C., during Spouse’s lifetime, all of the net income of Marital Trust is payable
to Spouse at least quarter-annually, and principal may be paid to or applied for the
benefit of Spouse as the trustees, in their discretion, consider necessary for Spouse’s
health, support, and maintenance. Article II, Paragraph C. provides no power to
Spouse to appoint any portion of Marital Trust.

         Upon Spouse’s death, Article II, Paragraph C.3. provides that after payment of
any taxes attributable to Marital Trust’s inclusion in Spouse’s estate, certain distributions
are to be made prior to distribution of the remainder. First, $a is to be distributed to
Grandchild 1 and Grandchild 2 in equal shares and, if either Grandchild is not then
living, then such equal share shall be distributed to that grandchild’s then living issue, by
right of representation. Second, $b is to be distributed to Charity 1 and Charity 2 in
equal shares. After these distributions, the residue of Marital Trust is to be distributed
free of trust, one-half to each of Child 1 and Child 2, and if Child 1 or Child 2 is not then
living, then such respective share is to be distributed to that child’s then living issue by
right of representation.

        Article IV, Paragraph K. of Trust provides that the trustees are vested with
specific powers with respect to the trust estate, and any part of it. Specifically, the
trustees may partition, allot, and distribute the trust estate, or any division or periodic,
partial or final distribution of the trust estate, in undivided interests or in kind, or partly in
money and partly in kind. The trustees are under no obligation to make a pro rata
division, or to distribute the same assets to beneficiaries similarly situated, but rather the
PLR-108779-24                                 3

trustees may, in their discretion, make a non-pro rata division between trusts or shares
and non-pro rata distributions to beneficiaries, so long as the assets allocated to the
separate trusts or shares, or distributed to the beneficiaries, have equivalent or
proportionate fair market values.

       Article VIII, Paragraph K. provides that no interest in the principal or income of
any trust or share created under Trust may be anticipated, assigned, or encumbered by
any beneficiary, or subject to any creditor’s claim or to legal process, prior to its actual
receipt by the beneficiary.

       Decedent’s executor elected on Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, to treat Marital Trust as qualified terminable
interest property (QTIP) under § 2056(b)(7) of the Internal Revenue Code (Code).
Upon the death of Spouse, the assets of Marital Trust will be included in Spouse’s gross
estate under § 2044 of the Code.

       On Date 4, several years after the death of Decedent, Child 1 became Spouse’s
duly authorized agent under a durable financial power of attorney governed by the laws
of State 2. As Spouse’s agent, Child 1 was empowered to renounce and disclaim any
property or property interest or power to which Spouse may become entitled by gift,
testate succession, or intestate succession.

        On Date 5, the trustees, Spouse through Child 1 in Child 1’s capacity as
Spouse’s duly authorized agent, Child 1 in her individual capacity and on behalf of
Child 1’s issue, and Child 2 in her individual capacity and on behalf of Child 2’s issue,
as all of the interested current, presumptive remainder, and contingent remainder
beneficiaries of Marital Trust under Trust, entered into an Agreement for Marital Trust
(Agreement). Agreement was amended on Date 6.

        Pursuant to Agreement as amended on Date 6, the trustees will divide Marital
Trust into Trust 1 and Trust 2. Trust 1 will hold cash and/or securities having a fair
market value on the date of division equal to an amount not to exceed the amount of
Spouse’s currently available unused federal gift tax exclusion under § 2505 of the Code,
and Trust 2 will hold the balance of property remaining in Marital Trust after funding
Trust 1. Trust 1 and Trust 2 will have the same terms as Marital Trust including the
distributions to Grandchild 1, Grandchild 2, Charity 1, and Charity 2, pursuant to
Article II, Paragraph C.3. upon Spouse’s death.

       Following the division of Marital Trust into Trust 1 and Trust 2, Spouse through
Child 1 in Child 1’s capacity as Spouse’s duly authorized agent, will renounce and
disclaim all of Spouse’s interest in Trust 1. As a consequence of Spouse’s disclaimer,
the assets in Trust 1 will be distributed to Grandchild 1, Grandchild 2, Charity 1, and
Charity 2 in accordance with Article II, Paragraph C.3. as proportionately divided
between Trust 1 and Trust 2, and the remainder of Trust 1 will be distributed to Child 1
and Child 2, outright and free of trust.
PLR-108779-24                                 4


        Statute 1 provides that except as otherwise provided by the terms of the trust
instrument, a trustee may combine two or more trusts into a single trust or divide a trust
into two or more separate trusts if the combination or division does not impair the rights
of any beneficiary, substantially affect the accomplishment of the purposes of the trust
or trusts, or violate the rule against perpetuities applicable to the trust or trusts.

       Statute 2 provides that a person may disclaim, in whole or part, any interest in or
power over property, including a power of appointment. A person may disclaim the
interest or power even if its creator imposed a spendthrift provision or similar restriction
on transfer or a restriction or limitation on the right to disclaim.

       Pursuant to Agreement, a petition was filed to approve the agreement and a
notice of hearing on the petition was served on Grandchild 1, Grandchild 2, Charity 1,
and Charity 2. State 1 Court issued an Order on Date 7 and an amended Order on
Date 8, ratifying and approving Agreement and amendment to Agreement, contingent
upon Spouse obtaining a favorable private letter ruling from the Internal Revenue
Service.

        You have requested the following rulings:

    1.      The division of Marital Trust into Trust 1 and Trust 2 will not cause Marital
           Trust, Trust 1, Trust 2, 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 Trust into Trust 1 and Trust 2, Trust 1 and Trust 2
           will continue to be QTIP trusts under § 2056(b)(7).

    3.      Upon Spouse’s disclaimer of her interest in Trust 1, Spouse will be treated as
           having made a gift of her qualifying income interest in Trust 1 under § 2511,
           and as having made a gift of all of the interests in Trust 1 other than the
           qualifying income interest under § 2519.

    4.      Spouse’s disclaimer of her interest in Trust 1 will not cause any property in
           Trust 2 to be treated as a gift by Spouse under § 2519.

    5.      The value of the property in Trust 1 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 her interest in Trust 1 will not cause her interest in
           Trust 2 to be valued at zero under § 2702.
PLR-108779-24                                 5

RULING 1

       Section 61(a)(3) of the Internal Revenue Code 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.

      In the present case, Marital Trust will be severed into Trust 1 and Trust 2 on a
non-pro rata basis. The operating provisions of Trust 1 and Trust 2 are the same as
those of Marital Trust.

       Under the terms of Marital Trust, the trustees are authorized to distribute trust
principal or income on a non-pro rata basis. As the proposed non-pro rata severance of
Marital Trust is authorized under the terms of the trust, the non-pro rata funding of
Trust 1 and Trust 2 is consistent with the criterion set forth in § 1.1001-1(h)(1)(ii) for an
exchange of property for property not materially different in kind or in extent under §§ 61
and 1001.

        Accordingly, based upon the facts submitted and the representations made, we
conclude that the division of Marital Trust into Trust 1 and Trust 2 on a non-pro rata
basis will not cause Marital Trust, Trust 1, Trust 2 or any beneficiary of these three
trusts to recognize ordinary income or loss, or capital gain or loss, under § 61 or § 1001.
PLR-108779-24                                  6

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, Spouse has a qualifying income interest in life in Marital Trust. After
the division of Marital Trust into Trust 1 and Trust 2, 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
submitted and the representations made, we conclude that after the division of Marital
Trust into Trust 1 and Trust 2, Trust 1 and Trust 2 will continue to be QTIP trusts under
§ 2056(b)(7).
PLR-108779-24                                  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
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.
PLR-108779-24                                  8


       In this case, the trustees will divide Marital Trust into Trust 1 and Trust 2. At the
moment of division, Spouse will retain a qualifying income interest in both trusts. After
the division of Marital Trust, 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 upon the facts submitted and the representations made, Spouse’s
disclaimer of her income interest in Trust 1 will be treated as a disposition of her
qualifying income interest in Trust 1. Therefore, Spouse will make a gift of her
qualifying income interest in Trust 1 under § 2511 and will make a gift of all of the
interests in Trust 1 other than the qualifying income interest under § 2519.

       We also conclude, based upon the facts submitted and the representations
made, that Spouse’s disclaimer of her interest in Trust 1 will not cause any property in
Trust 2 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 her interest in Trust 1 will result in
Spouse making a gift, under § 2519, of the entire fair market value of the assets in
Trust 1, 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 upon the facts
submitted and the representations made, we conclude that the value of the property in
Trust 1 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).

        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
PLR-108779-24                                    9

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 her income interest in Trust 1. We concluded
above that the disclaimer will not cause any property in Trust 2 to be treated as a gift by
Spouse under § 2519. Accordingly, based upon the facts submitted and the
representations made, we conclude that Spouse’s disclaimer of her interest in Trust 1
will not cause her interest in Trust 2 to be valued at zero under § 2702.

       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.

      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.

         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,


                                     Leslie H. Finlow
                                    _____________________________
                                    Leslie H. Finlow
                                    Senior Technician Reviewer, Branch 4
                                    Office of the Associate Chief Counsel
                                    (Passthroughs and Special Industries)


Enclosure:
      Copy for § 6110 purposes
PLR-108779-24                                          10


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