Could an estate make a QTIP marital-deduction election where the surviving spouse had a life estate plus broad power to sell, convey, or dispose of the property?

Plain-English summary

South Carolina Private Letter Ruling 87-12 held that the Estate of Mr. X could not make a qualified terminable interest property, or QTIP, election for the surviving spouse's interest.

The will gave Mrs. X a life estate in all real and personal property, broad rights to use the personal property, and power to sell and convey real estate without court or third-party permission.

The Commission interpreted that language as allowing her to appoint or transfer property to someone other than herself during her lifetime. That power violated a QTIP requirement.

What the will gave the spouse

Mr. X's will gave Mrs. X all of his real and personal property for her natural life.

It allowed her to:

• use any or all personal property as her own for living expenses and in any manner she desired;
• sell and convey the real estate by fee-simple title without court permission; and
• have complete use of the property for as long as she desired, with full rights to sell and convey when necessary or desirable.

The estate asked whether all or a specific part of that interest could receive QTIP treatment.

The terminable-interest rule

South Carolina section 12-15-60 adopted Internal Revenue Code section 2056.

Section 2056(b)(1) generally denied the marital deduction for a terminable interest when the surviving spouse's interest could end and another person could receive an interest in the property for less than full consideration.

Section 2056(b)(7) allowed an executor to elect QTIP treatment for an otherwise nondeductible terminable interest if the statutory requirements were met.

The QTIP lifetime-interest requirements

The ruling described qualified terminable interest property as property passing from the decedent in which the spouse held a qualifying income interest for life and to which an election applied.

For a qualifying income interest:

1. the spouse had to be entitled to all income from the property at least annually; and
2. no person could hold a power during the spouse's lifetime to appoint any part of the property to anyone other than the spouse.

The second requirement decided this case.

Why the spouse's power defeated the election

The testamentary language gave Mrs. X complete use and full rights to sell and convey.

The Commission concluded that this language permitted her to dispose of her life estate by an inter vivos gift, meaning a transfer during life.

Although common law generally prohibited a life tenant from making gifts that defeated remaindermen, the ruling noted that a life estate could be given to the remaindermen without leaving claims where the testamentary intent was served.

Because Mrs. X had authority to appoint the property to someone other than herself during life, her interest did not satisfy the QTIP condition.

Why the cited IRS ruling did not help

The estate relied on IRS Private Letter Ruling 8325056.

The Commission distinguished it because, in that IRS ruling, neither the spouse nor any other person had power under the will or state law to appoint any part of the property to anyone other than the spouse during the spouse's lifetime.

Mrs. X had broader authority under Mr. X's will, so the comparison did not support QTIP treatment.

What this means for you

Estate executors

PLR 87-12 required close review of the spouse's lifetime powers, not merely whether the will used the words life estate.

Estate-planning attorneys

Broad powers to use, sell, convey, or give property can conflict with the QTIP restriction against appointment to anyone other than the surviving spouse.

Surviving spouses

The issue was not whether Mrs. X had too little access. The broad transfer power was what disqualified the interest under the ruling.

Trust officers and tax preparers

An IRS private letter ruling involving narrower powers did not control a will granting materially broader lifetime authority.

Readers applying the ruling today

PLR 87-12 applied 1987 state and federal estate-tax rules to specific testamentary language. Current marital-deduction statutes, regulations, state property law, will construction, severability, partial elections, and return requirements must be checked independently.

Common questions

Q: Did the estate qualify for the QTIP election?

A: No. The spouse's interest was not eligible.

Q: Which requirement failed?

A: The rule prohibiting any person from appointing property to someone other than the spouse during the spouse's lifetime.

Q: Why did the sale-and-convey power matter?

A: The Commission interpreted it as authority broad enough to dispose of the interest to another person during life.

Q: Did the spouse receive only income?

A: No. The will also granted broad use of personal property and power to sell and convey real estate.

Q: Did IRS Private Letter Ruling 8325056 control?

A: No. The cited IRS ruling involved an arrangement where no person had the disqualifying appointment power.

Q: Can another estate rely on PLR 87-12?

A: No. The ruling states that it applied only to the Estate of Mr. X's specific will and facts, had no precedential value, and was not intended for general distribution.

Citations and references

• S.C. Code section 12-15-60 (Supp. 1986) — South Carolina adoption of Internal Revenue Code section 2056
• Internal Revenue Code section 2056(b)(1) — terminable-interest limitation
• Internal Revenue Code section 2056(b)(7) — QTIP election and qualifying income interest
• IRS Private Letter Ruling 8325056 — narrower appointment powers distinguished in the ruling
• 51 Am. Jur. 2d, section 74 — life-estate gift discussion cited in the ruling
• S.C. Code section 12-3-170 (1976) and SC Revenue Procedure 87-3 — private-letter-ruling authority

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR87-12.pdf

Original ruling text

SC PRIVATE LETTER RULING #87-12

TO:

The Estate of Mr. X

SUBJECT:

Marital Deduction

REFERENCE:

S.C. Code Ann. Section 12-15-60 (Supp. 1986)
IRS Private Letter Ruling 8325056
Internal Revenue Code 2056(b)(7)

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
Is the Qualified Terminable Interest Property election available for all or any specific part of an
interest passing to the surviving spouse pursuant to Item II of the Decedent's will whereby the
spouse has complete use of the decedent's property for as long a period as she desires with full
right to sell and convey, if such becomes necessary or desirable.
Facts:
Mr. X died leaving a will which devised a life estate in all realty and personality to his wife, Mrs.
X. The provisions of Item II of the will are as follows:
I devise and bequeath unto my beloved wife, Mrs. X, all of the property which I possess,
both realty and personalty, of every kind whatsoever and wherever situated for and
during the term of her natural life, with the right to use any and all of the personalty as
her own for her living expenses and in whatever manner she desires. And the further
right to sell and convey by way of fee simple title any of the real estate which I own
without permission of the Court or anyone else. It being my intention that my wife shall
have the complete use of my property for as long a period as she desires with full right to
sell and convey, if such becomes necessary or desirable.

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Discussion:
Pursuant to 12-15-60, South Carolina has adopted Internal Revenue Code Section 2056. Section
2056(b)(1) of the Code provides that no deduction is allowed if a nondeductible terminable
interest passes from the decedent to the surviving spouse. Generally, an interest in property is a
non- deductible terminable interest where, on the occurrence of an event, an interest passing to
the surviving spouse will terminate and an interest in the property passes (for less than an
adequate and full consideration in money or money's worth) from the decedent to another person.
Under Section 2056(b)(7) of the Code, an executor can elect to treat property as qualified
terminable interest property. If the election is made, an otherwise nonqualifying terminable
interest will qualify for the marital deduction. Qualified terminable interest property is property
which passes from the decedent, in which the spouse has a qualifying income interest for life,
and to which an election applies. The surviving spouse has a qualifying income interest for life
if:
(1)

The surviving spouse is entitled to all the income from the property, payable
annually or at more frequent intervals.

(2)

No person has a power to appoint, during the spouse's lifetime, any part of the
property to any person other than the surviving spouse.

In the Estate of Mr. X the second requirement disqualifies the wife's interest as qualified
terminable interest property due to the fact that she has the authority to appoint the property to
other than herself during her lifetime.
In IRS Private Letter Ruling 8325056 used as support for the position that the X Estate qualifies
for a QTIP election, no person including the spouse, under either the terms of the will or
provisions of state law, had a power to appoint any part of the property, to any person other than
the spouse during his lifetime.
The testamentary language "my wife shall have the complete use of my property for as long a
period as she desires with full right to sell and convey" indicates that she can dispose of her life
estate by inter vivos gift. Common law creates a general prohibition against inter vivos gifts by
persons holding a life estate since to do such would defeat the interests of the remaindermen. (51
Am Jur 2d Section 74) However, it has been held that where the life estate has been gifted to the
remaindermen, no claims exist and the testamentary intent has been served.
Therefore, the QTIP election is not available to the X Estate.

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Conclusion:
The wife's interest in the X Estate is not eligible for the Qualified Terminable Interest election
because the wife has the authority to appoint the property to other than herself during her
lifetime.
SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr
S. Hunter Howard, Jr., Chairman

s/John M. Rucker
John M. Rucker, Commissioner

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
December 15
, 1987

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