Estate gets a late QTIP election and zero GST inclusion ratios for two trusts

Plain-English summary

A decedent had created trusts that, at death, provided for a marital-deduction trust, a credit shelter trust, and a trust for the decedent's mother. The estate's accountant failed to make the qualified terminable interest property (QTIP) election on either the original or supplemental estate tax return. The accountant also allocated generation-skipping transfer (GST) exemption using an incorrect funding amount for the credit shelter trust. The IRS granted the executors 120 days to make the QTIP election on another supplemental Form 706. It ruled that the GST allocation exceeding the amount needed to give the credit shelter trust a zero inclusion ratio was void, leaving the unused exemption to be automatically allocated to the mother's trust. Both trusts therefore have zero inclusion ratios, subject to the stated condition that the exemption allocated to the mother's trust equals its estate-tax value.

Ruling snapshot

• Question: May the estate make a late QTIP election, and do the credit shelter and mother's trusts have zero GST inclusion ratios?
• Outcome: Approved (120-day QTIP extension and favorable GST rulings)
• Key authorities: IRC §§ 2056(b)(7), 2631, 2632, 2642; Treas. Reg. §§ 20.2056(b)-7, 26.2632-1, 301.9100-3

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201850008                                              Third Party Communication: None
Release Date: 12/14/2018                                       Date of Communication: Not Applicable
Index Number: 9100.00-00, 2056.00-00,
              2632.00-00                                       Person To Contact:
                                                               ----------------, ID No. ------------------
-----------------------------------------                      Telephone Number:
------------------------------------------                     ----------------------
-------------------                                            Refer Reply To:
------------------------------------------------               CC:PSI:B04
                                                               PLR-108929-18
         In Re: -------------------------------                Date:
                                                               September 12, 2018




LEGEND

Decedent                   =        -------------------------------------------------------
Date 1                     =        ------------------------
Spouse                     =        ---------------------------------------------------
Trust 1                    =        ----------------------------------------------------------------------
Date 2                     =        --------------------------
Date 3                     =        ------------------------
Date 4                     =        ----------------------
Mother                     =        -------------------------------
Date 5                     =        --------------------------
Trust 2                    =        --------------------------------
Child                      =        --------------------------
CPA                        =        --------------------------
Date 6                     =        ----------------------------
x                          =        --------------
y                          =        --------------
a                          =        ------------
z                          =        --------------
Year                       =        -------
Attorney                   =        ------------------------



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

       This letter responds to the letter dated March 9, 2018, submitted by your
authorized representative, requesting an extension of time under § 301.9100-1 and
§ 301.9100-3 of the Procedure and Administration Regulations to make a qualified


terminable interest property (QTIP) election under § 2056(b)(7) of the Internal Revenue
Code (Code) and rulings regarding the applicability of § 2632 to certain trusts.

FACTS

       The facts submitted and the representations made are as follows:

     Decedent died testate on Date 1, a date after December 31, 2000, survived by
Spouse and children.

      On Date 2, Decedent established a revocable trust, Trust 1, which was amended
on Date 3 and Date 4. Trust 1 became irrevocable upon Decedent’s death.

        Pursuant to the terms of Trust 1, as amended, upon Decedent’s death, the trust
estate is to be held in further trust for the benefit of Mother (Mother’s Trust). During
Mother’s lifetime, the trustee is to pay to or apply for the benefit of Mother so much of
the net income and/or principal of Mother’s Trust as the trustee deems advisable for
Mother’s health, education, support and maintenance. Any income not distributed is to
be added to principal. Upon the death of Mother, the trust estate is to be held in further
trust for the benefit of Spouse and Decedent’s issue.

       Pursuant to Article VI of Trust 1, if any of Decedent’s exemption is allocated to
property of a trust created under Trust 1, and the trust results in a generation-skipping
inclusion ratio of other than zero, then the trustee must immediately create two separate
trusts and each separate trust will have a generation-skipping inclusion ratio of either
zero (exempt portion) or one (non-exempt portion). The trustee may combine trusts
having the same inclusion ratio with the same beneficiaries, or may separate trusts with
different terms for different beneficiaries. Mother survived Decedent and then
subsequently died on Date 5.

      Also on Date 2, Decedent and Spouse established a revocable trust, Trust 2,
which was amended on Date 4. Trust 2 became irrevocable upon Decedent’s death.

       Article VI, Paragraph 6.D of Trust 2 provides that at the death of the first to die of
Decedent and Spouse, the residue of Trust 2 is to be divided into two separate trusts,
Trust A (Credit Shelter Trust) and Trust B (QTIP Trust).

       Under Article VI, Credit Shelter Trust shall consist of the maximum pecuniary
amount of Decedent’s estate which will not cause any more than the minimum possible
federal estate tax at the death of Decedent.

        Article VI, Paragraph 6.D.(2)(b) provides that only assets eligible for the estate
tax marital deduction shall be allocated to the QTIP Trust. Moreover, it is the settlors’
intention for QTIP Trust to qualify for the marital deduction under § 2056(b)(7). During


Spouse’s lifetime, trustee shall pay to or apply for the benefit of Spouse the net income
of QTIP Trust in quarter-annual or more frequent installments. Spouse has the power to
require the trustee to make all or part of the principal of QTIP Trust productive or to
convert promptly any unproductive part of the trust fund into productive property. The
trustee shall also pay to or apply for the benefit of Spouse such sums of principal of
QTIP Trust as trustee, in trustee’s discretion considers necessary for Spouse’s proper
health, support and maintenance. On the death of Spouse, the remaining principal of
QTIP Trust is to be distributed in exempt and non-exempt shares, as applicable, under
the terms of Credit Shelter Trust.

       Spouse and Child are the co-trustees of Trust 1 and Trust 2, and the co-
executors of Decedent’s estate under § 2203. The co-executors engaged CPA to
prepare the Form 706, United States Estate (and Generation-Skipping Transfer) Tax
Return for Decedent’s estate. A Supplemental Form 706 was filed on Date 6. On the
Schedule M of both the original Form 706 and Supplemental Form 706, CPA failed to
make an election to treat the property passing to QTIP Trust as “qualified terminable
interest property.” Thus, no QTIP election under § 2056(b)(7) was made with respect to
property passing to QTIP Trust.

       On Schedule R of the original Form 706 and Supplemental Form 706, CPA
reported no lifetime allocations of Decedent’s GST exemption. On Part I, Line 9 of the
Schedule R, CPA allocated Decedent’s GST exemption between Credit Shelter Trust
and Mother’s Trust. However, CPA incorrectly reported the amount of Decedent’s GST
exemption applied to Credit Shelter Trust as $x and to Mother’s Trust as $a. Upon
subsequent review, it was discovered that Credit Shelter Trust was funded with $y,
instead of $x. Accordingly, Credit Shelter Trust was overfunded by $z.

      In Year, the co-executors consulted with Attorney for assistance in completing
the administration of the estate. The errors made on Decedent’s Form 706 and
Supplemental Form 706 were discovered upon Attorney’s review of the estate.

      You request the following rulings:

1.     An extension of time under §§ 301.9100-1 and 301.9100-3 to make a QTIP
election under § 2056(b)(7) to treat QTIP Trust as QTIP property.

2.    The GST tax inclusion ratio with respect to Mother’s Trust is zero; and

3.    The GST tax inclusion ratio with respect to Credit Shelter Trust is zero.


LAW AND ANALYSIS

Ruling 1

     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 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)(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.

         Under § 2056(b)(7), a marital deduction is allowed for qualified terminable
interest property (QTIP), which is defined 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)(B)(v) applies. Section 2056(b)(7)(B)(v)
provides that an election 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)(2)(i) of the Estate Tax Regulations provides that the
QTIP election may relate to all or any part of property that meets the requirements of
§ 2056(b)(7)(B)(i), provided that any partial election must be made with respect to a
fractional or percentage share of the property. The fraction or percentage may be
defined by a formula.

       Section 20.2056(b)-7(b)(2)(ii)(A) provides that, in general, a trust may be divided
into separate trusts to reflect a partial election that has been made, or is to be made, if
authorized under the governing instrument or otherwise permissible under local law.
Any such division must be accomplished no later than the end of the period of estate
administration. If, at the time of the filing of the estate tax return, the trust has not yet
been divided, the intent to divide the trust must be unequivocally signified on the estate
tax return.

      Section 20.2056(b)-7(b)(4)(i) 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.

        Under § 301.9100-1(c) of the Procedure and Administration Regulations, 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 301.9100-2 provides automatic extensions of time for making certain elections.
Section 301.9100-3 provides extensions of time for making elections that do not meet
the requirements of § 301.9100-2.

      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 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 the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Accordingly, the executors are
granted an extension of time of 120 days from the date of this letter to make a
QTIP election with respect to QTIP Trust.

      The QTIP election should be made on a supplemental Form 706 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.

Rulings 2 and 3

        Section 2601 imposes a tax on every GST. A GST is defined under § 2611(a) as
(1) a taxable distribution, (2) a taxable termination, and (3) a direct skip.

       Section 2602 provides that the amount of the tax imposed by § 2601 is the
taxable amount multiplied by the applicable rate.



       Section 2641(a) defines the applicable rate as the product of the maximum
federal estate tax rate and the inclusion ratio with respect to the transfer.

       Under § 2642(a), the inclusion ratio with respect to any property transferred in a
GST is the excess (if any) of one over the applicable fraction. The applicable fraction,
as defined in § 2642(a)(2), is a fraction, the numerator of which is the amount of the
GST exemption under § 2631 allocated to the trust, and the denominator of which is the
value of the property transferred to the trust.

       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)(1) 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 26.2632-1(b)(4)(i) of the Generation-Skipping Transfer Tax Regulations
provides, in part, that an allocation of GST exemption to a trust is void to the extent the
amount allocated exceeds the amount necessary to obtain an inclusion ratio of zero
with respect to the trust.

       Section 26.2632-1(d)(1) provides, in part, that an allocation of a decedent’s
unused GST exemption by the executor of the decedent’s estate is made on the
appropriate United States Estate (and Generation-Skipping Transfer) Tax Return
(Form 706) filed on or before the date prescribed for filing the return by § 6075(a)
(including any extensions actually granted). An allocation of GST exemption to a trust
(whether or not funded at the time the Form 706 is filed) is effective if the notice of
allocation clearly identifies the trust and the amount of the decedent’s GST exemption
allocated to the trust.

       Section 2632(e)(1) provides that any portion of such individual’s GST exemption
which has not been allocated within the time prescribed by § 2632(a) shall be deemed
to be allocated as follows: first, to property that is the subject of a direct skip occurring
at such individual’s death; and second, to trusts with respect to which such individual is
the transferor and from which a taxable distribution or taxable termination might occur at
or after such individual’s death.

       In this case, under the terms of Trust 2, as amended, $y passed to Credit Shelter
Trust. Accordingly, based upon the facts submitted and the representations made, the


allocation of GST exemption made on Schedule R with respect to Credit Shelter Trust in
excess of $y was void as provided in § 26.2632-1(b)(4)(i), because an allocation of $y
was the amount necessary to obtain an inclusion ratio of zero with respect to the trust.
Consequently, pursuant to § 2632(e)(1), the amount of Decedent’s available GST
exemption remaining after the allocation of $y to Credit Shelter Trust, was automatically
allocated to Mother’s Trust effective as of Decedent’s date of death. Mother’s Trust has
an inclusion ratio of zero, provided the amount of GST exemption allocated to this trust
is equal to the amount transferred to this trust for federal estate tax purposes.

         In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to your authorized representatives.

       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.


                                           Sincerely,

                                           Associate Chief Counsel
                                           (Passthroughs & Special Industries)


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



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