A trust received time for severance and a reverse-QTIP election

Plain-English summary

A decedent's revocable trust directed the trustee to create one share funded with the decedent's unused generation-skipping transfer tax exemption and another share for the balance. The original trustee reported the entire trust as QTIP property but failed to sever it, make a reverse-QTIP election for the intended exempt share, or attach Schedule R to allocate GST exemption. A successor trustee discovered the omissions and proposed a fractional severance based on date-of-death values. The IRS granted 120 days to divide the trust into exempt and nonexempt shares and make the reverse-QTIP election for the exempt share. It also ruled that section 2632(e)(1)'s automatic allocation rules would allocate the decedent's unused GST exemption to that share.

Ruling snapshot

• Question: Could the trust receive more time to sever, make a reverse-QTIP election, and obtain automatic GST-exemption allocation?
• Outcome: Approved, with a 120-day extension and automatic allocation to the exempt trust
• Key authorities: IRC §§ 2056(b)(7), 2632(e)(1), 2652(a)(3), and 2654; Treas. Reg. § 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201624015                                              Third Party Communication: None
Release Date: 6/10/2016                                        Date of Communication: Not Applicable
Index Number: 2056.01-00, 2632.03-00,
              2652.01-02, 2654.00-00,                          Person To Contact:
              9100.00-00                                       ----------------------, ID No. ------------------
                                                               Telephone Number:
----------------------------------------------------           ----------------------
------------------------------------------------------------   Refer Reply To:
----------------------------                                   CC:PSI:B4
                                                               PLR-137929-15
                                                               Date:
Re: -------------------------------                            March 2, 2016
------------------------------------------




Legend

Decedent          =        -----------------------
Spouse            =        -----------------------
Son               =        ------------------------------
Trust             =        ---------------------------------------------------------
                           -----------------------
Company           =        ---------------------------
Trustee 1         =        -------------------
Trustee 2         =        ----------------------------------------
Date 1            =        ----------------------
Date 2            =        ------------------------
Date 3            =        ---------------------------
Date 4            =        --------------------------
Date 5            =        -----------------
Date 6            =        ---------------------------
X                 =        --------------
Y                 =        ------------------

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

       This letter responds to a letter dated November 17, 2015, and subsequent
correspondence, from your authorized representative requesting an extension of time
under § 301.9100 and § 301.9100-3 of the Procedure and Administration Regulations to
sever a trust into an exempt trust and a non-exempt for generation-skipping transfer
(GST) tax purposes, to make a “reverse” qualified terminable interest property (QTIP)
election under § 2652(a)(3) of the Internal Revenue Code with respect to the exempt
PLR-137929-15                                 2

trust, and to apply the automatic allocation rules to allocate Decedent’s GST exemption
to the exempt trust.

     The facts and representations submitted are summarized as follows. On Date 1,
Decedent created a revocable trust, Trust. Trust was completely restated on Date 2.
Decedent died testate on Date 3, survived by Spouse.

       Article IV(1)(a) of Trust directs the trustee, after the Decedent’s death, to set
aside out of the trust estate as a separate trust, to be known as “Trust B,” a pecuniary
amount equal to Decedent’s federal generation-skipping tax exemption which remained
unallocated immediately before Decedent’s death, less the value for generation-
skipping tax purposes of all direct skips occurring by reason of Decedent’s death. The
balance of the trust estate is to be allocated to a separate trust, to be designated as
“Trust A,” if Spouse survives Decedent or as “Trust C” if Spouse does not survive
Decedent.

        Article IV(2)(a) provides, in part, that the trustee of Trust A and Trust B shall pay
the income of Trust A and Trust B to Spouse in convenient installments at least as often
as quarter-annually during her life. Article IV(2)(b) provides, in part, that the trustee may
also make discretionary distributions of so much or all of the principal of Trust A and
Trust B to Spouse during her life for Spouse’s support, medical care, welfare, and best
interest. Article IV(3) provides, in part, that upon Spouse’s death, the trustee shall
distribute any accrued or undistributed income on Trust A and Trust B to Spouse’s
estate. In addition, Article IV(3) describes a portion of Trust A that the trustee is to
allocate to Trust B, with the balance of Trust A to be allocated to Trust C. Thereafter
the trustee shall hold Trust B as a single trust for the benefit of Son and his
descendants.

        Upon Decedent’s death, Trustee 1 became the successor trustee of Trust and
served as executor of Decedent’s estate. Trustee 1 acted as his own legal counsel
during the time that he served as executor of Decedent’s estate and as successor
trustee of Trust. On Date 4, Trustee 1 prepared and timely filed Decedent’s Form 706,
United States Estate (and Generation-Skipping Transfer) Tax Return, and reported
Trust on Part 4 of the return. Trustee 1 also reported Trust as QTIP property on
Schedule M of the Form 706 and, therefore, is deemed to have made the QTIP election
to have Trust treated as qualified terminable interest property under § 2056(b)(7).
Trustee 1 failed to sever Trust into Trust A and Trust B and, correspondingly, failed to
identify Trust A and Trust B as separate trusts and did not make a “reverse” QTIP
election under § 2652 with respect to Trust B. Trustee 1 also failed to attach
Schedule R to the Form 706 and, as a result, Decedent’s GST exemption was not
allocated to either Trust A or Trust B.

       On Date 5, Trustee 1 died. On Date 6, Trustee 2 became the successor trustee
of Trust. Upon review of the Trust records Trustee 2 discovered the failure of Trustee 1
PLR-137929-15                                 3

to make a reverse QTIP election with respect to Trust B and to allocate Decedent’s
GST exemption to Trust B. Pursuant to the terms of Trust, Trustee 2 will sever and fund
Trust A and Trust B. Trustee 2 will fund Trust B by allocating to Trust B an amount
equal to a fraction of the current net fair market value of Trust’s assets, the numerator of
which is X, Decedent’s unused GST tax exemption remaining on the date of his death,
and the denominator of which is Y, the total value of Trust’s assets as of Decedent’s
date of death.

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)(7)(A) provides that, in the case of qualified terminable interest
property, 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 2601imposes a tax on every generation-skipping transfer (within the
meaning of subchapter B) made by a “transferor” to a skip person. Under § 2611(a), the
term “generation-skipping transfer” means a taxable distribution, a taxable termination,
and a direct skip.

       Section 2602 provides that the amount of the tax is the taxable amount multiplied
by the applicable rate.

       Section 2641(a) defines the term “applicable rate” with respect to any generation-
skipping transfer, as the product of the maximum federal estate tax rate and the
inclusion ratio with respect to the transfer.

       Section 2631(a), as in effect for the year at issue, provides that for purposes of
determining the inclusion ratio, every individual shall be allowed a GST exemption of
$1,000,000 (adjusted for inflation under § 2631(c)) which may be allocated by such
individual (or his executor) to any property with respect to which such individual is the
transferor. Section 2631(b) provides that any allocation under § 2631(a), once made,
shall be irrevocable.
PLR-137929-15                                  4

         Section 2632(a) provides that any allocation by an individual of his or her GST
exemption under § 2631(a) may be made at any time on or before the date prescribed
for filing the estate tax return for such individual's estate (determined with regard to
extensions), regardless of whether such a return is required to be filed.

       Section 2632(e)(1) provides that any portion of an individual's GST exemption
which has not been allocated within the time prescribed by § 2632(a) shall be deemed
to be allocated as follows: (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.

       Section 26.2632-1(d)(2) of the Generation-Skipping Transfer Tax Regulations
provides, in part, that a decedent's unused GST exemption is automatically allocated on
the due date for filing Form 706 to the extent not otherwise allocated by the decedent's
executor on or before that date. Unused GST exemption is allocated pro rata, on the
basis of the value of the property as finally determined for purposes of chapter 11, first
to direct skips treated as occurring at the transferor's death. The balance, if any, of
unused GST exemption is allocated pro rata on the basis of the chapter 11 value of the
nonexempt portion of the trust property to trusts with respect to which a taxable
termination may occur or from which a taxable distribution may be made.

       Section 2652(a)(1) provides, in part, that for purposes of chapter 13, the term
“transferor” means in the case of any property subject to the tax imposed by chapter 11,
the decedent. An individual shall be treated as transferring any property with respect to
which such individual is the transferor.

        Section 2652(a)(3) provides, in part, that in the case of any trust with respect to
which a deduction is allowed to the decedent under § 2056 by reason of subsection
(b)(7), the estate of the decedent may elect to treat all of the property in such trust for
GST tax purposes as if the election to be treated as qualified terminable interest
property had not been made (reverse QTIP election).

        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. Section 26.2652-2(b) provides that an election under
§ 2652(a)(3) is made on the return 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 purposes of chapter 13 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 and the terms of the new trusts provide in the aggregate for
the same succession of interests and beneficiaries as are provided in the original
PLR-137929-15                                 5

instrument and the severance occurs prior to the date prescribed for filing the Federal
estate tax return (including extensions actually granted) for the estate of the transferor
and either the new trusts are severed on a fractional basis.

        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 6 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.

       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 that granting relief will not prejudice
the interests of the government.

      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).

        Based on the facts submitted and representations made, we conclude that the
requirements of § 301.9100-3 are satisfied. Therefore an extension of time is granted
until 120 days from the date of this letter to sever Trust into an exempt trust and a non-
exempt trust, and to make a reverse QTIP election with respect to the exempt trust.
Finally, we rule that the automatic allocation rules of § 2632(e)(1) apply to automatically
allocate Decedent's unused GST exemption to the exempt trust.

         The reverse QTIP election should be made on a supplemental Form 706. The
supplemental Form 706 should be filed with the Cincinnati Service Center at the
following address: Internal Revenue Service Center – Stop 82, Cincinnati, OH 45999.
A copy of this letter should be attached to the supplemental Form 709. A copy of this
letter is enclosed for this purpose.

      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.

       Except as specifically ruled herein, we express no opinion on the federal tax
consequences of the transaction under the cited provisions or under any other
provisions of the Code.
PLR-137929-15                                  6

       The rulings in this letter pertaining to the federal estate and/or generation-
skipping transfer tax apply only to the extent that the relevant sections of the Internal
Revenue Code are in effect during the period at issue.

      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.

         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:    Lorraine E. Gardner
                                           Lorraine E. Gardner
                                           Senior Counsel, Branch 4
                                           Office f the Associate Chief Counsel
                                           (Passthroughs & Special Industries)

Enclosures (2)

       Copy of this letter
       Copy for § 6110 purposes

cc: