Estate received time for trust severance and reverse QTIP election

Plain-English summary

An estate timely elected QTIP treatment for a marital trust but failed to divide it into GST-exempt and nonexempt trusts or make a reverse QTIP election. The trustee had relied on tax professionals who did not advise that those steps were needed, and new counsel later discovered the errors. The IRS found that the requirements for discretionary relief were met and granted 120 days to sever the trust and make the reverse QTIP election for the exempt portion. It also ruled that the automatic allocation rules would allocate the decedent's unused generation-skipping transfer tax exemption to that trust.

Ruling snapshot

• Question: Could the estate obtain extra time to sever the marital trust and make a reverse QTIP election so the decedent's unused GST exemption would be allocated to the exempt trust?
• Outcome: Approved, with 120 days to complete the severance and election.
• Key authorities: IRC §§ 2632(c), 2652(a)(3), and 2642(g)(1)(B); Treas. Reg. §§ 26.2654-1(b)(1) and 301.9100-3; Notice 2001-50.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

                                                            Third Party Communication: None

Number: 201820015 Date of Communication: Not Applicable
Release Date: 5/18/2018
Index Number: 2632.00-00, 2652.01-02,
9100.00-00
Person To Contact:
----------------------------------- ------------------------------, ID No. ------------
----------------------- ---------
--------------------------- Telephone Number:
-------- --------------
Re: ----------------------------------------- Refer Reply To:
CC:PSI:B04 – PLR-129688-17
Date:
February 21, 2018

Legend

Decedent = ----------------------------------------------------
Spouse = ------------------------
Trustee = ------------------------
Date 1 = -------------------
Date 2 = ------------------------
Attorney = ----------------------------------
Accounting Firm = -------------------------------------
Accountant = ---------------------
Law Firm = -----------------------------------------
Trust = ------------------------------------------------------------------
Marital Trust = ------------------------------------

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

   This letter responds to your authorized representative’s letter dated September 6,

2017, requesting an extension of time under § 301.9100-3 of the Procedure and
Administration Regulations to sever Marital Trust into two trusts, the GST Non-Exempt
Marital Trust and the GST Exempt Marital Trust, and to make a reverse qualified
terminable interest property (QTIP) election under § 2652(a)(3) of the Internal Revenue
Code with respect to the GST Exempt Marital Trust, and apply the automatic allocation
rules to allocate Decedent’s Generation-Skipping Transfer (GST) exemption to the GST
Exempt Marital Trust.

    Decedent and Spouse executed Trust on Date 1. Decedent died on Date 2,

survived by Spouse, four children, and one grandchild. Article II, Paragraph C provides
that upon the death of the first spouse to die, Trustee is to divide Trust into three
separate trusts: the Decedent’s Trust, the Marital Trust, and the Survivor’s Trust. This
letter ruling pertains to Marital Trust.

PLR-129688-17 2

    Article II, Paragraph E of Trust provides that Marital Trust will consist of the

minimum dollar amount necessary to eliminate any federal estate tax of Decedent,
taking into account (1) the net value of all other property included in Decedent’s gross
estate that passes or has passed to or for the benefit of Spouse, under this trust or
otherwise that qualifies for the federal estate tax marital deduction; (2) all federal estate
tax deductions; and (3) all credits other than those for (i) death taxes paid in the estate
of one whose death occurs after the death of Decedent, or for (ii) any state death tax
unless at least some death tax would be payable to the state regardless of the federal
credit.

  Under Article IV, Spouse is to receive the net income from Marital Trust (i.e., the

Exempt Marital Trust and the Non-Exempt Marital Trust) at least quarter-annually.
Trustee is to pay to or for the benefit of Spouse as much of the principal of Marital Trust
as Trustee, in Trustee’s discretion, deems necessary for proper support, care, and
maintenance of Spouse after taking into account other income and resources of
Spouse.

    At Spouse’s death, the balance of the GST Non-Exempt Marital Trust shall be

distributed to or for the benefit of such one or more of the group consisting of issue of
Decedent and Spouse, as Spouse appoints by will. Any portion not effectively
appointed by the Spouse will be distributed to a children’s trust. At Spouse’s death, the
GST Exempt Marital Trust is to be distributed to a trust for the benefit of the then living
grandchildren of Decedent and Spouse.

    Upon Decedent’s death, Trustee retained Attorney to review Decedent’s Form

706, United States Estate (and Generation-Skipping Transfer) Tax Return and ensure
that it was filed in compliance with the terms of Trust and that all appropriate tax
elections were made. Trustee also retained Accounting Firm to prepare the Form 706
and work with Attorney. Decedent’s Form 706 was timely filed. On Schedule M, the
estate made the election under § 2056(b)(7) (qualified terminable interest property) for
Marital Trust. However, Form 706 did not indicate that Marital Trust was to be severed
into GST exempt and GST non-exempt trusts nor did it not make a reverse QTIP
election with respect to the GST Exempt Marital Trust. Accordingly, none of Decedent’s
GST exemption was allocated to any portion of the Marital Trust. Attorney died after the
Form 706 was filed. Neither Attorney nor Accountant advised Trustee of the need to
sever the Marital Trust, make a reverse QTIP election or apply Decedent’s GST
exemption to the GST Exempt Marital Trust. These errors were discovered by Law
Firm, Trustee’s new legal counsel.

PLR-129688-17 3

   Trustee requests that we grant the following rulings:

  1. An extension of time to sever Marital Trust into a GST Exempt Marital Trust

and a GST Non-Exempt Marital Trust pursuant to § 26.2654-1(b)(1) of the Generation-
Skipping Transfer Tax Regulations

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

the GST Exempt Marital Trust;

    3. The automatic allocation rules of § 2632 would then 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.

   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 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), no deduction is allowed for an interest passing to the

surviving spouse if, on the lapse of time, on the occurrence of an event or contingency,
or on the failure of an event or contingency to occur, the interest will terminate or fail.

    Under § 2056(b)(7)(A), 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)(A). Qualified terminable interest property is defined under
§ 2056(b)(7)(B)(i) as property: (1) which passes from the decedent to the surviving
spouse; (2) in which the surviving spouse has a qualifying income interest for life; and
(3) 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, 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-129688-17 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.

   Under § 2044, any property in which the decedent had a qualifying income

interest for life and for which a deduction was allowed under § 2056(b)(7) is includible in
the decedent’s gross estate.

    Section 2601 imposes a tax on every generation-skipping transfer (GST) made

by a transferor to a skip person. A GST is defined under § 2611(a) as: (1) a taxable
distribution; (2) a taxable termination; and (3) a direct skip.

   Under § 2631(a) (as in effect at the time of Decedent’s death) for purposes of

determining the inclusion ratio, every individual is allowed a GST exemption of
$1,000,000 (adjusted for inflation under § 2631(c)) 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, is
irrevocable.

   Section 2632(a)(1) provides that an individual's GST exemption may be allocated

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
return is required to be filed.

   Section 2632(c)(1) provides that any portion of an individual's GST exemption

which has not been allocated within the time prescribed by subsection (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) 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
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 estate tax purposes (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. However, 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.

PLR-129688-17 5

   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 that, in the case of any trust with respect to which a

deduction is allowed under § 2056(b)(7), the estate of the decedent may elect to treat all
of the property in such trust for purposes of chapter 13 as if the QTIP election had not
been made. This election is referred to as the "reverse" QTIP election. The
consequence of a reverse QTIP election is that the decedent remains, for GST tax
purposes, the transferor of the QTIP trust for which the election is made. As a result,
the decedent's GST exemption may be allocated to that QTIP trust.

   Section 26.2652-2(a) provides 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 26.2654-1(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 governing instrument does
not require or otherwise direct severance but the trust is severed pursuant to
discretionary authority granted either under the governing instrument or under local law;
and

   (A) The terms of the new trust provide in the aggregate for the same succession
   of interests and beneficiaries as provided in the original trust;

   (B) The severance occurs (or a reformation proceeding, if required, is
   commenced) prior to the date prescribed for filing the Federal estate tax return
   (including extensions actually granted) for the estate of the transferor; and

   (C)(1) The new trusts are severed on a fractional basis. If severed on a fractional
   basis, the separate trusts need not be funded with a pro rata portion of each
   asset held by the undivided trust. The trusts may be funded on a nonpro rata
   basis provided funding is based on either the fair market value of the assets on
   the date of funding or in a manner that fairly reflects the net appreciation or
   depreciation in the value of the assets measured from the valuation date to the
   date of funding.

   Under § 301.9100-1(c), 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

PLR-129688-17 6

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). Under § 301.9100-1(b), a regulatory election
includes an election whose due date is prescribed by a notice published in the Internal
Revenue Bulletin. In accordance with § 2642(g)(1)(B) and Notice 2001-50, 2001-34
I.R.B. 189, taxpayers may seek an extension of time to make an allocation described in
§ 2642(b)(1) under the provisions of § 301.9100-3.

    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 has acted reasonably and in good faith, and the grant of 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

standards of §§ 301.9100-1 and 301.9100-3 have been met. Therefore, an extension of
time is granted until 120 days from the date of this letter to sever Marital Trust into GST
Exempt Marital Trust and GST Non-Exempt Marital Trust and to make a reverse QTIP
election with respect to the GST Exempt Marital Trust. Finally, we rule that the
automatic allocation rules of § 2632(c) (as in effect on Date 2) will 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 (United

States Estate (and Generation-Skipping Transfer) Tax Return). The supplemental Form
706 should be filed on behalf of Decedent's estate with the Internal Revenue Service
Center, Cincinnati, OH 45999. A copy of this letter should be attached.

  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-129688-17 7

  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 representatives.

                                       Sincerely,




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

Enclosure
Copy for section 6110 purposes