Late relief to split a marital trust and make a "reverse QTIP" election so the estate's GST exemption sticks

Plain-English summary

When a wealthy person dies and leaves property in a marital trust for a surviving spouse, the estate can make a "reverse QTIP" election so that, for generation-skipping transfer (GST) tax purposes, the first spouse (not the surviving spouse) stays the "transferor." That lets the estate point its GST exemption at the trust, which shields future distributions to grandchildren from the separate GST tax. To do this cleanly, the trust is often split into a GST-exempt portion (fully covered by the exemption) and a non-exempt portion. Here the deceased spouse's advisors botched the paperwork on the estate tax return (Form 706): they misreported how much GST exemption was still available and never divided the marital trust or made the reverse QTIP election. The problem surfaced years later when the surviving spouse also died and a new firm reviewed the returns. The estate asked the IRS for extra time under the "9100 relief" regulations (Treas. Reg. § 301.9100-3) to sever the trust, make the reverse QTIP election, and allocate the exemption, all backdated to the first spouse's death. The IRS granted 120 days, finding the estate acted reasonably and in good faith by relying on tax professionals who dropped the ball. The upshot: the family keeps the GST protection it intended, avoiding GST tax that would otherwise hit distributions to younger generations.

Ruling snapshot

• Question: Should the estate get a late extension under § 301.9100-3 to sever the marital trust, make a reverse QTIP election under § 2652(a)(3), and allocate the decedent's GST exemption, all effective as of the date of death?
• Outcome: Approved (120-day extension granted)
• Key authorities: IRC § 2652(a)(3); Treas. Reg. §§ 301.9100-1, 301.9100-3, 26.2654-1(b)(1)(ii), 26.2652-2; IRC §§ 2642, 2632, 2056(b)(7); Notice 2001-50

Full text (IRS public release)

Internal Revenue Service                                      Department of the Treasury
                                                              Washington, DC 20224

Number: 201845007                                             Third Party Communication: None
Release Date: 11/9/2018                                       Date of Communication: Not Applicable
Index Number: 9100.00-00, 2642.00-00,
              2654.03-00                                      Person To Contact:
                                                              ---------------, ID No. -----------------
------------------------------                                Telephone Number:
------------------------                                      --------------------
---------------------------                                   Refer Reply To:
-------------------------------------------------             CC:PSI:B04
                                                              PLR-103623-18
         RE: -------------------------------                  Date:
                                                               July 31, 2018




LEGEND

Date 1                    =    ---------------------
Decedent                  =    ---------------------------------------------
Spouse                    =    -----------------------------------------------
Trust                     =    ----------------------------------------------------------------
                               -------------------------------------------------------------------------------------
                               -------------------------------------------------------------------------------------
                               ------------------------------------------------------
Date 2                    =    ------------------
Date 3                    =    -----------------------
Date 4                    =    -----------------------
Date 5                    =    ---------------------
Date 6                    =    -------------------
Law Firm                  =    ----------------------------------------------------------
Accounting Firm           =    ----------------------

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

       This letter responds to your authorized representative's letter of
January 2, 2018, 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 under § 26.2654-1(b)(1) of the Generation-Skipping Transfer (GST) Tax
Regulations.

FACTS

The facts and representations submitted are summarized as follows:
PLR-103623-18                                 2

On Date 1, Decedent and Spouse executed a revocable trust, Trust. Trust was revised
and restated on Date 2, and further amended on Date 3 and Date 4. Trust became
irrevocable upon Decedent's death on Date 5. Decedent was survived by Spouse,
children, and grandchildren.

Under the terms of Trust, on the death of the first settlor to die, the trustee shall divide
the trust estate into separate trusts: Survivor's Trust, to be funded with the separate
property and one-half of the community property of the survivor of the first settlor to die,
and the Credit Shelter Trust and Marital Trust, to be funded with the separate property
and one-half of the community property of the first settlor to die. Credit Shelter Trust
and Marital Trust became irrevocable upon the date of death of the first settlor to die.

Both Credit Shelter Trust and Marital Trust provide for distributions of net income to
Spouse during Spouse's lifetime and, upon Spouse's death, distributions to Decedent's
children and grandchildren. Under certain circumstances, principal may be paid in the
trustee's discretion to or for the benefit of Spouse.

Pursuant to Article III, Paragraph N, the trustee shall have the power to divide a trust
into separate trusts, one portion not to exceed the transferor's remaining GST
exemption (after taking into account any prior allocations made to lifetime gifts by
Decedent), and one portion comprised of the remaining trust estate from such trust.
Further, the trustee shall have the power to allocate any remaining GST exemption after
lifetime allocations to that first portion after division so that the applicable fraction for
that portion is one (1) and the transferor utilizes the maximum amount of the GST
exemption available for that portion. Any trust that is divided into separate portions shall
be held on terms and conditions that are equivalent to those terms of the trust from
which it was separated so that the aggregate interests of each beneficiary in the several
trusts are equivalent to the beneficiary's interest in the trust before separation, but each
trust portion created pursuant to Article III, Paragraph N shall be held from and after the
effective date of separation as a separate trust for all purposes.

Spouse served as executor of Decedent's estate and the trustee of Trust. Spouse
relied on Law Firm to prepare and provide advice regarding Decedent's Form 706,
United States Estate (and Generation-Skipping Transfer) Tax Return. Law Firm
prepared Decedent's Form 706, which shows on Schedule M an election under
§ 2056(b)(7) to treat Marital Trust as "qualified terminable interest property"
(QTIP). Schedule R of the Form 706 reflects the intent to allocate the full amount of
Decedent's GST exemption to the Marital Trust and no part of Decedent's GST
exemption to the Credit Shelter Trust. However, Spouse failed to effectively allocate
Decedent's GST exemption due to errors on the Schedule R. Spouse was not advised
to exercise the trust power in Article III, Paragraph N, to divide any trust into a GST
exempt portion and a GST non-exempt portion.

It is represented that a portion of Decedent's GST exemption was automatically
allocated under § 2632(b)(1) to transfers to several irrevocable trusts during her lifetime
PLR-103623-18                                3

and that Decedent had remaining GST exemption available at her death.
Spouse died on Date 6. Accounting Firm was retained to prepare and provide advice
regarding the Form 706 for Spouse's estate. In the course of this review, Accounting
Firm learned that line 8 of Part 1 on Schedule R of Decedent's Form 706 incorrectly
reported Decedent's available GST exemption available for allocation by failing to take
into account the automatic allocation of GST exemption to several of Decedent's lifetime
transfers. Accounting Firm also learned that Marital Trust had not been divided into a
GST exempt portion and a GST non-exempt portion, pursuant to Article III,
Paragraph N, so that a "reverse" QTIP election under § 2652(a)(3) could be made with
respect to only the exempt portion.

To date, there have been no taxable terminations or taxable distributions from Marital
Trust.

You request an extension of time under § 301.9100-3 and § 26.2654-1(b)(1)(ii) to sever
Marital Trust into a GST exempt portion (GST Exempt Marital Trust) and a GST non-
exempt portion (GST Non-Exempt Marital Trust), to make a reverse QTIP election
under § 2652(a)(3) with respect to GST Exempt Marital Trust, and to allocate
Decedent's available GST exemption to the GST Exempt Marital Trust, effective as of
the 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)(1) provides, in part, 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 adequate
            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;
PLR-103623-18                                4


and no deduction shall be allowed with respect to such interest.

Section 2056(b)(7)(A) provides that, in the case of QTIP, 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 QTIP as property which passes from the
decedent, in which the surviving spouse has a qualifying income interest for life, and to
which an election under this paragraph applies.

Section 2056(b)(7)(B)(v) provides, in part, that an election with respect to any property
shall be made by the executor on the return of tax imposed by § 2001.

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. 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 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 2631(a) provides that for purposes of determining the inclusion ratio, every
individual shall be allowed a GST exemption amount 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.

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
PLR-103623-18                                 5

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(c)(2) provides that for purposes of § 2632(c)(1), the unused portion of an
individual's GST exemption is that portion of such exemption which has not previously
been - (A) allocated by such individual, (B) treated as allocated under § 2632(b) with
respect to a direct skip occurring during or before the calendar year in which the indirect
skip is made, or (C) treated as allocated under paragraph (c)(1) with respect to a prior
indirect skip.

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 part, that in the case of any trust with respect to which a
deduction is allowed to the decedent under § 2056 by reason of § 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 QTIP 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)(ii) provides 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 trusts provide in the aggregate for the same succession
           of interests and beneficiaries as are 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) Either -

       (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 non pro rata
           basis provided funding is based on either the fair market value of the assets
PLR-103623-18                                 6

          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; or

       (2) If the severance is required (by the terms of the governing instrument) to be
           made on the basis of a pecuniary amount, the pecuniary payment is satisfied
           in a manner that would meet the requirements of § 26.2654-1(a)(1)(ii) if it
           were paid to an individual.

Notice 2001-50, 2001-2 C.B. 189, provides that under § 2642(g)(1)(B), the time for
allocating the GST exemption to lifetime transfers and transfers at death, the time for
electing out of the automatic allocation rules, and the time for electing to treat any trust
as a GST trust are to be treated as if not expressly prescribed by statute. The Notice
further provides that taxpayers may seek an extension of time to make an allocation
described in § 2642(b)(1) or (b)(2) or an election described in § 2632(b)(3) or (c)(5)
under the provisions of § 301.9100-1 through 301.9100-3.

Section 301.9100-1(c) provides that the Commissioner has discretion to grant a
reasonable extension of time under the rules set forth in §§ 301.9100-1 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
GST Exempt Marital Trust and GST Non-Exempt Marital Trust, to make a reverse QTIP
election with respect to GST Exempt Marital Trust, and to allocate Decedent's available
GST exemption to GST Exempt Marital Trust. The allocation will be effective as of
Decedent's date of death.
PLR-103623-18                                  7

The severance should be reported on a supplemental Form 706 for the estate of
Decedent. The supplemental Form 706 should be filed with the Internal Revenue
Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to the
supplemental Form 706.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

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.

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.

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)

                                       Karlene M. Lesho

                                   By: ____________________________
                                      Karlene M. Lesho
                                      Senior Technician Reviewer, Branch 4
                                      Office of Associate Chief Counsel
                                      (Passthroughs & Special Industries)



Enclosures (2)
      Copy for § 6110 purposes
      Copy of this letter



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