Estate gets extra time for reverse QTIP election and trust severance

Plain-English summary

A decedent's estate made a QTIP election for a marital trust but did not divide the trust into GST-exempt and non-exempt shares or make a reverse QTIP election. The accountant who prepared the estate tax return failed to advise the personal representative to take those steps, and the omission was discovered later by the surviving spouse's estate-planning attorney. The estate represented that the decedent had enough unused generation-skipping transfer tax exemption to allocate to the exempt share. The IRS found that the estate satisfied the reasonable-cause standards for late regulatory elections. It granted 120 days to sever the marital trust and make the reverse QTIP election, and ruled that the automatic allocation rules would apply the unused GST exemption to the GST-exempt marital trust.

Ruling snapshot

• Question: Could the estate belatedly sever the marital trust and make a reverse QTIP election after its accountant failed to advise it to do so?
• Outcome: approved
• Key authorities: IRC §§ 2632(e), 2652(a)(3); Treas. Reg. §§ 26.2652-2, 26.2654-1(b), 301.9100-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201750014                                              Third Party Communication: None
Release Date: 12/15/2017                                       Date of Communication: Not Applicable
Index Number: 2652.01-02, 2654.00-00,
              9100.00-00                                       Person To Contact:
                                                               -----------------------------------------------------
------------------------------------------------------------   -----------------
--                                                             Telephone Number:
-------------------------
------------------------------------------                     Refer Reply To:
                                                               CC:PSI:B04
                                                               PLR-112093-17
         ------------------------------------------            Date:
                                                               September 12, 2017




Legend

Decedent                       ------------------------------------------------
Spouse                         -------------------
Individual                     ----------------------------
Date 1                         --------------------
Date 2                         ----------------------------
Date 3                         -------------------
Year                           -------
Accountant                     ---------------------------
Attorney                       --------------------------------

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

       This letter responds to your authorized representative’s letter dated
April 10, 2017, and subsequent correspondence, requesting an extension of time under
§§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to
sever a trust into an exempt trust and a non-exempt trust and make a "reverse" qualified
terminable interest property (QTIP) election under § 2652(a)(3) of the Internal Revenue
Code (Code) for the exempt trust.

         The facts submitted are as follows:

       Decedent executed his will on Date 1. Article Fourth of the will provided that the
residuary estate was to be held in trust, and the trust property divided into two shares,
Fund A (Marital Trust) and Fund B (Bypass Trust). Fund A was to consist of an amount
equal to the minimum amount of property qualifying for the marital deduction which,
when added to all other property in Decedent’s gross estate passing to Spouse,
Decedent’s spouse, under the will, will eliminate all federal estate taxes payable by

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reason of Decedent’s death. The trustee of the trust is to pay to or apply for the benefit
of Spouse the net income of Marital Trust quarter-annually or more frequently. The
trustee may also pay to or apply for the benefit of Spouse the principal of Marital Trust
to provide for Spouse’s support, maintenance, health, and education. The remaining
property of the estate is to be held in Fund B.

        Article Fifteenth, Paragraph E of the will provides that the trustee is authorized to
exercise, in his absolute discretion, any elections and options given to him by any
provision of the Code, and any other statute or regulations, state or federal, governing
the administration of the estate, including the right to allocate GST exemption to any
property in the Decedent’s gross estate and the right to divide any trust into separate
trusts so that the inclusion ratio of each trust for GST tax purposes shall be zero or one.

       Decedent died on Date 2 in Year, survived by Spouse and children. Individual
served as the personal representative of Decedent’s estate. Individual retained
Accountant to prepare the Decedent's Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return. On Schedule M of the return, Individual
made a qualified terminable interest property (QTIP) election with respect to Marital
Trust. However, Accountant failed to advise Individual to divide Marital Trust into a GST
Exempt Marital Trust and a GST Non-exempt Marital Trust and to make a “reverse”
QTIP election in order to allocate Decedent's remaining GST exemption to the GST
Exempt Marital Trust. The Form 706 was timely filed on Date 3.

       Spouse hired Attorney to plan her estate. Attorney discovered the failure to
divide Marital Trust into a GST Exempt Marital Trust and GST Non-exempt Marital Trust
and to make a reverse QTIP election for the GST Exempt Marital Trust. It is
represented that Decedent has sufficient GST exemption available to allocate to the
GST Exempt Marital Trust.

       You have requested the following rulings:

1. An extension of time under §§ 301.9100-1 and 301.9100-3 to sever Marital Trust into
a GST Exempt Marital Trust and a GST Non-exempt Marital Trust pursuant to
§ 26.2654-1(b) of the Generation-Skipping Transfer Tax Regulations.

2. An extension of time to make a “reverse” QTIP election under § 2652(a)(3).

3. The automatic allocation rules of § 2632(e) will operate to cause the unused portion
of Decedent's GST exemption to be allocated to the 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.

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

       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 that 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, no deduction shall be
allowed under this section with respect to such interest -- (A) if an interest in such
property passes or has passed (for less than an adequate and full consideration in
money or money's worth) from the decedent to any person other than such surviving
spouse (or the estate of such spouse); and (B) if by reason of such passing such person
(or his heirs or assigns) may possess or enjoy any part of such property after such
termination or failure of the interest so passing to the surviving spouse; and no
deduction shall be allowed with respect to such interest (even if such deduction is not
disallowed under subparagraphs (A) and (B)) -- (C) if such interest is to be acquired for
the surviving spouse, pursuant to directions of the decedent, by his executor or by the
trustee of a trust.

       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 2056(b)(7)(B)(i) defines the term "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; and (III) to which an election under § 2056(b)(7)
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, or has a usufruct interest for
life in the property; and (II) no person has a power to appoint any part of the property to
any person other than the surviving spouse.

PLR-112093-17                                 4




      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. Such an election, once made, shall be irrevocable.

        Section 20.2056(b)-7(b)(4)(i) of the Estate Tax Regulations provides that, in
general, the election referred to in § 2056(b)(7)(B)(i)(III) and (v) is made on the return of
tax imposed by § 2001 (or § 2101). For purposes of this paragraph, the term "return of
tax imposed by § 2001" means the last estate tax return filed by the executor on or
before the due date of the return, including extensions or, if a timely return is not filed,
the first estate tax return filed by the executor after the due date.

       Section 2601 imposes a tax on every generation-skipping transfer.
Section 2611(a) provides that the term "generation-skipping transfer" means: (1) a
taxable distribution; (2) a taxable termination; and (3) a direct skip.

       Section 2602 provides that the amount of the GST tax is determined by
multiplying the taxable amount by the applicable rate. Section 2641(a) provides that the
term "applicable rate" means, with respect to any GST transfer, the product of the
maximum federal estate tax rate and the inclusion ratio with respect to the transfer.

       Section 2631(a), as in effect on Decedent’s date of death, provides that, for
purposes of determining the inclusion ratio, every individual shall be allowed a
GST exemption of $1,000,000 that may be allocated by the individual (or his 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) 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, in general, 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 that a decedent's unused GST exemption is automatically allocated on the due
date for filing the Form 706, or Form 706NA, to the extent not otherwise allocated by the

PLR-112093-17                                  5

decedent's executor on or before that date. Unused GST exemption is allocated pro
rata (subject to the rules of § 26.2642-2(b)), on the basis of the value of the property as
finally determined for purposes of chapter 11 (chapter 11 value), first to direct skips
treated as occurring at the transferor's death. The balance, if any, of unused GST
exemption is allocated pro rata (subject to the rules of § 26.2642-2(b)) 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. 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. The automatic allocation is irrevocable.

       Section 2642(a)(1) provides that, generally, the inclusion ratio with respect to any
property transferred in a GST is the excess of one over the applicable fraction
determined for the trust. Section 2642(a)(2) provides that, in general, 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 2652(a)(1) provides that for purposes of chapter 13, 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.

        Section 2652(a)(3) provides, in pertinent part, that in the case of any trust with
respect to which a deduction is allowed to the decedent under § 2056(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
instrument and the severance occurs prior to the date prescribed for filing the federal

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estate tax return (including extensions actually granted) for the estate of the transferor
and 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 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 that granting 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.

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

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

      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-112093-17                                7

      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,


                                      Associate Chief Counsel
                                      Passthroughs and Special Industries


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


      Enclosures
            Copy for § 6110 purposes
            Copy of this letter