Unneeded QTIP election voided, but spouse becomes GST transferor

Plain-English summary

An estate made a QTIP election for a marital trust even though the spouse already held a qualifying lifetime income interest and a testamentary general power of appointment. Because the election was unnecessary to reduce estate tax to zero, the IRS treated it as null under Rev. Proc. 2001-38, so the trust property would not enter the spouse's estate under section 2044 and section 2519 would not apply. However, a court-approved termination of the trust released the spouse's general power of appointment. The IRS ruled that the spouse made a taxable gift to the extent the trust property's value exceeded the consideration received, but declined to determine that value. It also held that the spouse became the GST transferor to the extent of that taxable gift.

Ruling snapshot

• Question: What estate, gift, and GST tax consequences follow from voiding the QTIP election and terminating the spouse's trust interest?
• Outcome: Mixed
• Key authorities: IRC §§ 2044, 2056(b)(5) and (7), 2512, 2514, 2519, and 2652; Rev. Proc. 2001-38

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
Washington, DC 20224

Number: 201615004                                             Third Party Communication: None
Release Date: 4/8/2016                                        Date of Communication: Not Applicable
Index Number: 2056.07-00, 2044.00-00,
2652.01-02, 2519.00-00,                         Person To Contact:
2514.02-00, 2041.02-00                          -------------------------- --------------------------
--------------------------------------
----------------------                                        Telephone Number:
-------------------------                                     ---------------------
------------------------------------                          Refer Reply To:
CC:PSI:B04
In Re: ---------------------------------------------------- PLR-124603-15
-----------------------------------------------------       Date:
January 11, 2016

Legend

Decedent                         -----------------------------------------------------------------------------------
Spouse                           -----------------------------------------------------------------------------------
Date 1                           -----------------------------------------------------------------------------------
Date 2                           -----------------------------------------------------------------------------------
Date 3                           -----------------------------------------------------------------------------------
Date 4                           -----------------------------------------------------------------------------------
Trust                            -----------------------------------------------------------------------------------
a                                -----------------------------------------------------------------------------------
State                            -----------------------------------------------------------------------------------
State Statute 1                  -----------------------------------------------------------------------------------
State Statute 2                  -----------------------------------------------------------------------------------
Probate Court                    --

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

This letter responds to your authorized representative’s letter dated
July 15, 2015, requesting a ruling that, pursuant to Rev. Proc. 2001-38, 2001-1 C.B.
1335, the qualified terminable interest property (QTIP) election made with respect to
Trust C is a nullity for federal gift, estate and generation-skipping transfer (GST) tax
purposes, and rulings regarding the gift, estate, and GST tax consequences to Spouse
upon the termination of Trust C.

The facts and representations submitted are summarized as follows:

On Date 1, Decedent executed Trust, a revocable trust, and a will. Decedent’s
will provided that all remaining property (other than his personal tangible property) is

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devised to the successor trustee of Trust. The successor trustee is to hold, administer,
and distribute the property in accordance with the provisions of Trust.

Article VIII of Trust provides that upon Decedent’s death, the trustee is to divide
Trust into two separate shares, “Marital Share” and “Trust B.” The Marital Share is to
be a fraction of Trust. The numerator of the fraction is the maximum available marital
deduction amount allowable to the estate reduced by the amount needed to increase
Decedent’s taxable estate to the largest amount that, after allowing for the unified credit
against the federal estate tax, will result in the smallest federal estate tax being imposed
on the estate. The denominator of the fraction is equal to the value of the Trust estate
as finally determined for estate tax purposes. Trust B is to be comprised of the balance
of the Trust estate.

Article VIII of Trust further provides that Marital Share is to be further divided into
two trusts, “Trust C-1” and “Trust C.” Trust C-1 is to be a fraction of Trust. The
numerator of the fraction is equal to Decedent’s available GST exemption minus the
amount allocated to Trust B. The denominator of the fraction is equal to the value of the
Trust estate as finally determined for estate tax purposes. Trust C is to be a fraction of
Trust. The numerator of the fraction is equal to the Marital Share numerator minus the
amount of the Trust C-1 numerator. The denominator of the fraction is equal to the
value of the Trust estate as finally determined for estate tax purposes.

Article IX(1) of Trust provides, in relevant part, that the trustee is to pay to or
apply for the benefit of any of Decedent’s issue, such sums from the net income and/or
principal of Trust B in such shares and proportions as in its sole discretion are advisable
for the medical care, education, support, and maintenance of Decedent’s issue.

Article IX(2) of Trust provides, in relevant part, that when Decedent’s youngest
child reaches age 25, the trustee is to divide Trust B as then constituted into equal
separate shares so as to provide one share for each then living child of Decedent and
one share for each deceased child of Decedent who shall leave issue then living.

Article IX(3) of Trust provides, in relevant part, that after the division into shares
for children, all the net income from each share so provided for a living child of
Decedent is to be paid in convenient installments to or applied for the benefit of the child
until complete distribution of the share as herein provided.

Article X(1) of Trust provides that commencing with the date of Decedent’s death,
the trustee is to pay or apply for the benefit of Spouse during her lifetime all the net
income from Trust C for each tax year of Trust C, payable in convenient installments but
no less frequently than quarter-annually. Any accrued and undistributed income at the
death of Spouse is to be paid to her personal representatives.

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Article X(2) of Trust provides that the trustee may pay to or apply for the benefit
of Spouse such sums from the principal of Trust C as in its sole discretion shall be
necessary or advisable from time to time for the medical care, education, support and
maintenance in reasonable comfort of Spouse, taking into consideration any other
income or resources of Spouse known to the trustee.

Article X(4) of Trust provides that upon the death of Spouse, the entire remaining
principal of Trust C is to be paid over, conveyed and distributed to or in trust for such
appointee or appointees from among Decedent’s issue, or estate in the manner and in
the proportions as Spouse may appoint in and by the last will of Spouse, making
specific reference to the general power of appointment herein conferred upon Spouse.
In default of the exercise of this power of appointment by Spouse, or insofar as any part
of Trust C is not effectively appointed, then upon the death of Spouse, the entire
remaining principal of Trust C is to be held and administered or distributed in whole or in
part, as if it had been an original part of Trust B.

Article XI(1) of Trust provides that commencing with the date of Decedent’s
death, the trustee is to pay or apply for the benefit of Spouse during her lifetime all the
net income from Trust C-1 for each tax year of Trust C-1, payable in convenient
installments but no less frequently than quarter-annually. Any accrued and
undistributed income at the death of Spouse is to be paid to her personal
representatives.

Article XI(2) of Trust provides that the trustee may pay to or apply for the benefit
of Spouse such sums from the principal of Trust C-1 as in its sole discretion shall be
necessary or advisable from time to time for the medical care, education, support and
maintenance in reasonable comfort of Spouse, taking into consideration any other
income or resources of Spouse known to the trustee.

Article XI(5) of Trust provides that upon the death of Spouse, the entire
remaining principal of Trust C-1 is to be added to and become part of Trust B and is to
be held and administered or distributed in whole or in part, as if it had been an original
part of Trust B.

Decedent died on Date 2 survived by Spouse and two children from a prior
marriage. Decedent’s youngest child has not yet reached age 25. Trust B, Trust C, and
Trust C-1 are administered in State.

The executor of Decedent's estate timely filed a Form 706, United States Estate
(and Generation-Skipping Transfer) Tax Return. The executor listed Trust C and Trust
C-1 on Schedule M of Form 706, and, by doing so, was deemed to have made the QTIP
election with respect to those trusts.

PLR-124603-15                                4

State Statute 1 provides that a noncharitable irrevocable trust may be terminated
upon consent of all beneficiaries if the court concludes that continuance of the trust is
not necessary to achieve any material purpose of the trust. A noncharitable irrevocable
trust may be modified upon consent of all of the beneficiaries if the court concludes that
modification is not inconsistent with a material purpose of the trust. State Statute 2
provides that upon termination of a trust under State Statute 1, the trustee shall
distribute the trust property as ordered by the court.

On Date 3, the trustee, Spouse, and Decedent’s children entered into a
Settlement Agreement to terminate Trust C and Trust C-1. Upon termination, Spouse
will be paid $a in cash and securities, which represents the liquid assets of Trust. In
exchange, the trustee agreed to pay a percentage of Spouse’s income tax liability, if
any, with respect to the distribution and any gift taxes payable under § 2519, if any, with
respect to the distribution. Upon termination, Spouse will be treated as deceased for all
purposes, and the remaining assets of Trust C and Trust C-1 will be distributed to
Trust B. On the same date, the trustee, Spouse, and Decedent’s children petitioned
Probate Court to approve the termination of Trust C and Trust C-1 and the distribution
of $a to Spouse and the remaining property of the trusts to Trust B. On Date 4, Probate
Court concluded that the standard for termination of the trusts under State Statute 1
was met and continuance of Trust C and Trust C-1 was not necessary to achieve any
material purposes of the trusts, which was to provide for Spouse and Decedent’s
children. Probate Court ordered that Trust C and Trust C-1 shall terminate and the
assets would be distributed pursuant to the Settlement Agreement. This private letter
ruling request is limited to the tax consequences to Trust C and Spouse as a result of
the termination of Trust C.

You have requested the following rulings:

1) Since Trust C qualifies for the marital deduction pursuant to § 2056(b)(5),
pursuant to Rev. Proc. 2001-38, the QTIP election made with respect to Trust C
is a nullity for purposes of §§ 2044(a), 2056(b)(7), 2519(a), and 2652.

2) The termination of Spouse’s interest in Trust C will result in an inter vivos release
of her testamentary general power of appointment. However, the amount of the
gift is offset by the value of consideration received by Spouse for the exchange
under § 2512(b).

PLR-124603-15                                          5

3) For purposes of the GST tax, Spouse will not be treated as the transferor of
Trust C.-------------------------------------------------------------------------------------------------

LAW AND ANALYSIS

Ruling 1

Section 2001(a) of the Internal Revenue Code 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. Section 2056(b)(1) provides the general rule
that a marital deduction is not allowed for an interest passing to the surviving spouse
that is a “terminable interest.” An interest is a terminable interest if the interest passing
to the surviving spouse 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)(5) provides that, in the case of an interest in property passing
from the decedent, if the surviving spouse is entitled for life to all the income from the
entire interest, or all the income from a specific portion thereof, payable annually or at
more frequent intervals, with power in the surviving spouse to appoint the entire interest,
or such specific portion (exercisable in favor of such surviving spouse, or of the estate
of such surviving spouse, or in favor of either, whether or not in each case the power is
exercisable in favor of others), and with no power in any other person to appoint any
part of the interest, or such specific portion, to any person other than the surviving
spouse -- (A) the interest or such portion thereof so passing shall, for purposes of
§ 2056(a), be considered as passing to the surviving spouse, and (B) no part of the
interest so passing shall, for purposes of § 2056(b)(1)(A), be considered as passing to
any person other than the surviving spouse. This paragraph shall apply only if such
power in the surviving spouse to appoint the entire interest, or such specific portion
thereof, whether exercisable by will or during life, is exercisable by such spouse alone
and in all events.

Section 2056(b)(7) provides that for purposes of § 2056(a), QTIP is treated as
passing to the surviving spouse, and no part of the property is treated as passing to any
person other than the surviving spouse. Under § 2056(b)(7)(B)(i), QTIP is property
which passes from the decedent, in which the surviving spouse has a qualifying income
interest for life, and to which an election under § 2056(b)(7)(B)(v) applies.

PLR-124603-15                                 6

Section 2056(b)(7)(B)(v) provides that the election to treat property as QTIP
under § 2056(b)(7) is made by the executor on the return of tax imposed by § 2001.
The election, once made, is irrevocable.

Section 2044(a) and (b) provides generally that the value of the gross estate
includes the value of any property in which the decedent had a qualifying income
interest for life and with respect to which a deduction was allowed for the transfer of the
property to the decedent under § 2056(b)(7).

Section 2519(a) and (b) provide, in part, that any disposition of all or part of a
qualifying income interest for life in any property with respect to which a deduction was
allowed under § 2056(b)(7) is treated as a transfer of all interests in the property other
than the qualifying income interest.

Section 2652(a) provides that, in the case of property subject to an election
under § 2056(b)(7), the surviving spouse will be treated as the transferor of the property
for generation-skipping transfer tax purposes in the absence of a "reverse QTIP"
election under § 2652(a)(3).

In general, under Rev. Proc. 2001-38, a QTIP election under § 2056(b)(7) will be
treated as null and void for purposes of §§ 2044(a), 2056(b)(7), 2519(a), and 2652,
where the election was not necessary to reduce the estate tax liability to zero, based on
values as finally determined for federal estate tax purposes. The revenue procedure
provides an example where a QTIP election was made when the taxable estate (before
allowance of the marital deduction) was less than the applicable exclusion amount
under § 2010(c). Another example set forth in the revenue procedure is where the
decedent's will provides for a “credit shelter trust” to be funded with an amount equal to
the applicable exclusion amount under § 2010(c), with the balance of the estate passing
to a marital trust intended to qualify under § 2056(b)(7). The estate makes QTIP
elections with respect to both the credit shelter trust and the marital trust. The QTIP
election for the credit shelter trust was not necessary, because no estate tax would
have been imposed whether or not the QTIP election was made for that trust. See Rev.
Proc. 2001-38, section 2.

In this case, based on the facts submitted and representations made, the QTIP
election with respect to Trust C was not necessary to reduce the estate tax liability to
zero. That is, the estate tax liability would have been zero whether or not the election
was made with respect to Trust C. Accordingly, we rule that the QTIP election with
respect to Trust C is null and void for purposes of §§ 2044, 2056(b)(7), 2519 and 2652.
The property held in Trust C will not be includible in the gross estate of Spouse under
§ 2044, and Spouse will not be treated as making a gift under § 2519 if Spouse
disposes of the income interest with respect to that property.

PLR-124603-15                                 7

Further, we rule that the QTIP election will not cause Spouse to be treated as the
transferor of the property in Trust C for generation-skipping transfer tax purposes under
§ 2652. However, as will be discussed in further detail in the discussion of Ruling 3,
Spouse’s release of her general power of appointment will cause her to be treated as
the transferor of the property in Trust C for generation-skipping transfer tax purposes
under § 2652.

Ruling 2

Section 2501(a) imposes a gift tax for each calendar year on the transfer of
property by gift during the year by an individual.

Section 2511 provides that the gift tax 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 2512(a) provides that if the gift is made in property, the value thereof at
the date of the gift is considered the amount of the gift.

Section 2512(b) provides that where property is transferred for less than an
adequate and full consideration in money or money's worth, the amount by which the
value of the property exceeded the value of the consideration shall be deemed a gift.

Section 2514(b) provides that the exercise or release of a general power of
appointment created after October 21, 1942, is deemed a transfer of property by the
individual possessing such power.

Section 2514(c) provides, in relevant part, that for purposes of § 2514, the term
"general power of appointment" means a power which is exercisable in favor of the
decedent, his estate, his creditors, or the creditors of his estate.

Section 25.2512-8 of the Gift Tax Regulations provides, in relevant part, that
transfers reached by the gift tax are not confined to those only which, being without a
valuable consideration, accord with the common law concept of gifts, but embrace as
well sales, exchanges, and other dispositions of property for a consideration to the
extent that the value of the property transferred by the donor exceeds the value in
money or money's worth of the consideration given therefor. However, a sale,
exchange, or other transfer of property made in the ordinary course of business (a
transaction which is bona fide, at arm's length, and free from any donative intent), will
be considered as made for an adequate consideration in money or money's worth.

Section 25.2514-3(c)(4) provides, in part, that a release of a power of
appointment need not be formal or express in character. For example, the failure to

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exercise a general power of appointment created after October 21, 1942, within a
specified time so that the power lapses, constitutes a release of the power.

Upon the termination of Spouse’s interest in Trust C, Spouse released her
general power of appointment under § 2514. Pursuant to § 2514(b), the release of this
general power of appointment is deemed a taxable transfer by Spouse of the value of
the Trust C assets at the time of the release. Accordingly, based upon the facts and
representations made, we rule that the termination of Spouse’s interest in Trust C will
result in an inter vivos release of her testamentary general power of appointment.

Further, we rule that pursuant to § 2512(b), where Spouse releases her general
power and transfers the assets of Trust C for less than an adequate and full
consideration in money or money's worth, the amount by which the value of the Trust C
property exceeded the value of the consideration that Spouse received shall be deemed
a gift. Accordingly, only the excess of the fair market value of the Trust C assets at the
time of the release over the value of the consideration received therefor by Spouse
would be deemed a taxable gift.

Spouse requested a ruling that the amount of the gift will be offset by the value of
consideration received by Spouse for the exchange under § 2512(b). The value of this
gift is a question of fact and the Service does not rule on such factual determinations.
See § 6.02 of Rev. Proc. 2015-1, 2015-1 I.R.B. 1, 17.

Ruling 3

Section 2652(a) provides, in relevant part, that 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.

In this case, we have previously ruled that Spouse made a taxable gift equal to
the excess of the fair market value of the Trust C assets at the time of the release of
Spouse’s general power of appointment over the value of the consideration received by
Spouse. Accordingly, based on the facts submitted and the representations made, we
conclude that Spouse is the transferor of Trust C for GST purposes to the extent that
she made a taxable gift.

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, we neither express nor imply any opinion
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

PLR-124603-15                                    9

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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)

Enclosures
Copy for § 6110 purposes
Copy of this letter