QTIP trust severance isolates spouse's disclaimer

Plain-English summary

A marital trust had been elected as qualified terminable interest property and divided into GST-exempt and GST-nonexempt shares. The trustee proposed splitting the nonexempt share into a cash trust and a trust holding the remaining property, after which the surviving spouse would make a nonqualified disclaimer of all interests in the cash trust. The IRS ruled that the severance and disclaimer would not disturb the original marital deduction or the QTIP status of the remaining trusts. The spouse would make taxable transfers under sections 2519 and 2511 only with respect to the disclaimed cash trust, not the other shares. Section 2702 would not reduce the retained income interests in the other trusts to zero, and the property transferred from the cash trust would not later be included in the spouse's estate under section 2044.

Ruling snapshot

• Question: What gift, estate, and QTIP consequences follow from severing one marital trust and disclaiming only the new cash trust?
• Outcome: Approved on all six requested rulings.
• Key authorities: IRC §§ 2044, 2056(b)(7), 2511, 2519, and 2702.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201946009 Third Party Communication: None
Release Date: 11/15/2019 Date of Communication: Not Applicable
Index Number: 2044.00-00, 2056.00-00,
2056.07-00, 2511.00-00, Person To Contact:
2519.00-00, 2702.00-00 ------------------------, ID No. ------------------
---------------------------------------------------
----------------------- Telephone Number:
------------------------ --------------------
----------------------------------------------- Refer Reply To:
CC:PSI:B04
PLR-106041-19
In Re: ---------------------------------------------------- Date:
-------------------------------------------------------- July 30, 2019

Legend

Date 1 = ------------------
Decedent = -----------------------
------------------------
Trust = ------------------------------------------------------------------------

Date 2 = ------------------------
Spouse = -----------------------
------------------------
Bank: = -----------------------------
Daughter: = ----------------------
------------------------
Date 3 = ------------------
GST Non-Exempt Trust = -----------------------------------------------------------------------

--

---------------------------------------------------------------

$a = --------------
State Statute 1 = ---------------------------------
State Statute 2 = -----------------------------------
PLR-106041-19 2

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

This letter responds to your authorized representative’s letter dated December 17,
2018, and subsequent correspondence, requesting rulings concerning the federal gift
and estate tax treatment of the proposed severance of a marital trust and the proposed
renunciation by Spouse of her interest in one of the divided marital trusts.

FACTS

The facts submitted and the representations made are summarized as follows:

On Date 1, Decedent created Trust, a revocable trust. Trust was amended by
Decedent several times prior to his death on Date 2, at which time Trust became
irrevocable. Decedent was survived by Spouse.

Under Article Eight, Section 1 of Trust, at Decedent’s death, the trustee is directed to
divide Trust into a family share (Family Share) and a marital share (Marital Share). The
Marital Share is held in accordance with the provisions of Article Nine of Trust.

Under Article Nine, in relevant part, the trustee shall pay to or apply for the benefit of
Spouse at least annually all of the net income of the Marital Share. In addition, the
trustee may distribute to or for the benefit of Spouse as much of the principal of the
Marital Share as the Trustee considers necessary or advisable for Spouse’s education,
health, maintenance and support. Upon Spouse’s death, the Marital Share shall be
held in further trust for Decedent’s issue. The current trustees of the Marital Share are
Spouse, Bank and Daughter.

On Date 3, Decedent’s executor timely filed Form 706, United States Estate (and
Generation-Skipping Transfer) Tax Return, for Decedent’s estate. On Schedule M,
Bequests, etc., to Surviving Spouse, attached to the return, the executor made an
election to treat the Marital Share as qualified terminable interest property (QTIP) under
§ 2056(b)(7) of the Internal Revenue Code. The trustee severed the Marital Share into
two shares, one with a GST tax inclusion ratio of zero (GST Exempt Trust) and the
other with a GST tax inclusion ratio of one (GST Non-Exempt Trust).

The trustee proposes to sever the GST Non-Exempt Trust into two trusts, Trust A and
Trust B. Trust A will contain approximately $a in cash and Trust B will contain the
remaining GST Non-Exempt Trust property. Following the bifurcation of the GST Non-
Exempt Trust into Trust A and Trust B, Spouse will renounce her entire interest in
Trust A by making a non-qualified disclaimer of her interest in Trust A, and
subsequently, Trust A will be held in further trust for Decedent’s issue in accordance
with the provisions of Article XII of Trust, as if Spouse had predeceased Decedent.

State Statute 1 provides that after notice to the qualified beneficiaries, a trustee may
PLR-106041-19 3

divide a trust into two or more separate trusts, if the result does not materially impair the
rights of any beneficiary or adversely affect achievement of the purposes of the trust.

State Statute 2 provides, in relevant part, that a person may disclaim any interest in or
power over property, including an interest in a trust, even if its creator imposed a
spendthrift provision or similar restriction on the transfer or a limitation on the right to
disclaim. The disclaimed interest will then pass as if the disclaimant had died
immediately before the interest was created.

You have requested the following rulings:

1. After the GST Non-Exempt Trust is severed into two trusts, Trust A and Trust B, as
   permitted by State law, and Spouse renounces her entire interest in the property in
   Trust A, such actions will have no effect on the election under § 2056(b)(7) by the estate
   to qualify the GST Exempt Share and the GST Non-Exempt Share for the federal estate
   tax marital deduction, or on the status of Trust A and Trust B as QTIP trusts.

2. After the GST Non-Exempt Trust is severed into Trust A and Trust B and Spouse
   renounces her entire interest in the property in Trust A, the subsequent distribution and
   termination of Trust A will not cause Trust B or the GST Exempt Trust to fail to be
   qualified terminable interest property under § 2056(b)(7).

3. After Spouse disclaims her entire interest in the property in Trust A, Spouse will be
   deemed to have made a transfer of all of the property of Trust A under § 2519 other
   than the value of her qualifying income interest, and Spouse will be deemed to have
   made a transfer of her qualifying income interest under § 2511.

4. After Spouse disclaims her entire interest in the property in Trust A, Spouse will not
   be deemed to have made a transfer of the property in Trust B or in the GST Exempt
   Marital Trust under § 2519 or a transfer of her qualifying income interest in the property
   of Trust B or the GST Exempt Marital Trust under § 2511.

5. After Spouse disclaims her entire interest in the property in Trust A, the value of
   Spouse’s income interest in Trust B or the GST Exempt Trust will not be valued at zero
   under § 2702.

6. After Spouse disclaims her entire interest in the property in Trust A, the property in
   Trust A that is deemed to be transferred under § 2519 will not be included in Spouse’s
   gross estate under § 2044(b)(2), provided spouse survives three years from the date of
   the transfer.

LAW AND ANALYSIS

Rulings 1 and 2
PLR-106041-19 4

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, except as limited by § 2056(b), the value of the taxable
estate is to 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), a marital deduction is not allowable for an interest in property
passing to the surviving spouse that is a “terminable interest.” An interest passing to
the surviving spouse is a terminable interest if it will terminate or fail on the lapse of time
or on the occurrence of an event or contingency, or on the failure of an event or
contingency to occur and, on termination, an interest in the property passes to someone
other than the surviving spouse.

Section 2056(b)(7) allows an estate tax marital deduction for qualified terminable
interest property. Under § 2056(b)(7)(B)(i), the term “qualified terminable interest
property” means property that passes from the decedent, in which the surviving spouse
has a qualifying income interest for life, and to which the qualified terminable interest
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 the surviving spouse is entitled to all the income from the property,
payable annually or at more frequent intervals, and no person has a power to appoint
any part of the property to any person other than the surviving spouse during the
surviving spouse’s life.

Pursuant to the terms of Marital Trust and with respect to the qualified terminable
interest property election made by Decedent’s estate, the assets of the GST Non-
Exempt Trust are treated as qualified terminable interest property under § 2056(b)(7)(i).

Spouse has a qualifying income interest for life in the GST Non-Exempt Trust. After the
proposed division of the GST Non-Exempt Trust into Trust A and Trust B pursuant to
the applicable State law, Spouse will have a qualifying income interest for life in both
Trust A and Trust B.

The severance of the GST Non-Exempt Trust into Trust A and Trust B does not
materially impair the rights of any beneficiary or adversely affect the achievement of the
purposes of the trust.

Therefore, based on the facts submitted and the representations made, after the GST
Non-Exempt Trust is severed into two trusts, Trust A and Trust B, as permitted by State
PLR-106041-19 5

law, and Spouse subsequently disclaims Trust A, such action will have no effect on the
election under § 2056(b)(7) by the estate to qualify the GST Exempt Trust and the GST
Non-Exempt Trust for the federal estate tax marital deduction, nor the status of Trust A
and Trust B as QTIP trusts.

Moreover, after the GST Non-Exempt Trust is severed into Trust A and Trust B and
Spouse disclaims her interest in Trust A, the subsequent distribution and termination of
Trust A will not cause Trust B or the GST Exempt Trust to fail to be qualified terminable
interest property under § 2056(b)(7).

Rulings 3 and 4

Section 2501 imposes a tax on the transfer of property by gift. Section 2511(a) provides
that the tax imposed by § 2501 shall apply whether the transfer is in trust or otherwise,
whether the gift is direct or indirect, and whether the property is real or personal,
tangible or intangible.

Section 25.2511-1(c)(1) of the Gift Tax Regulations provides that the gift tax applies to
gifts indirectly made. Thus, any transaction in which an interest in property is
gratuitously passed or conferred upon another, regardless of the means or device
employed, constitutes a gift subject to tax.

Section 25.2511-2(a) provides that the gift tax is a primary and personal liability of the
donor, is an excise upon his act of making the transfer, is measured by the value of the
property passing from the donor, and attaches regardless of the fact that the identity of
the donee may not then be known or ascertainable.

Section 2519(a) provides that any disposition by the surviving spouse of all or part of a
qualifying income interest for life in any property for which a deduction was allowed
under § 2056(b)(7) is treated as a transfer by the surviving spouse of all interests in the
property other than the qualifying income interest. The transfer of the qualifying income
interest is a transfer subject to gift tax under § 2511.

Section 25.2519-1(c)(1) provides that the amount treated as a transfer under § 2519
upon a disposition of all or part of a qualifying income interest for life in qualified
terminable interest property is equal to the fair market value of the entire property
subject to the qualifying income interest, determined on the date of the disposition
(including any accumulated income and not reduced by any amount excluded from total
gifts under § 2503(b) with respect to the transfer creating the interest), less the value of
the qualifying income interest in the property on the date of the disposition. The gift tax
consequences of the disposition of the qualifying income interest are determined
separately under § 25.2511-2.

In this case, Spouse will disclaim her entire interest in Trust A, and Spouse will retain
PLR-106041-19 6

her income interest in Trust B. Therefore, after Spouse disclaims her entire interest in
the property in Trust A, Spouse will be deemed to have made a transfer of all of the
property of Trust A under § 2519, other than the value of Spouse’s qualifying income
interest, and Spouse will be deemed to have made a transfer of her qualifying income
interest under § 2511.

As stated above, pursuant to State law and the representations made herein, after the
division of the GST Non-Exempt Trust, Spouse’s interest in Trust A will be separate and
distinct from her interest in Trust B. Therefore, after Spouse renounces her entire
interest in the property in Trust A, Spouse will not be deemed to have made a gift of the
property in Trust B or the GST Exempt Trust under § 2519.

Ruling 5

Section 2702(a)(1) provides that solely for the purpose of determining whether a
transfer of an interest in trust to (or for the benefit of) a member of the transferor’s family
is a gift (and the value of such transfer), the value of any interest in such trust retained
by the transferor or any applicable family member (as defined in § 2701(e)(2)) shall be
determined as provided in § 2702(a)(2).

Section 2702(a)(2) provides that the value of any retained interest which is not a
qualified interest (as defined in § 2702(b)) shall be treated as being zero and the value
of any retained interest that is a qualified interest (as defined in § 2702(b)) shall be
determined under § 7520. Under § 25.2702-2(a)(3), the term “retained” means held by
the same individual both before and after the transfer in trust.

In this case, the GST Non-Exempt Trust will be divided into two separate trusts, Trust A
and Trust B. We have concluded above that Spouse’s disclaimer of her entire interest
in Trust A will not result in a transfer under § 2519 with respect to any interest in
Trust B. Accordingly, Spouse will not be treated as making a deemed gift under § 2519
with respect to Trust B. Section 2702 does not apply to the division of the GST Non-
Exempt Trust and the disclaimer by Spouse of her entire income interest in Trust A.
Therefore, after Spouse disclaims her interest in the property in Trust A, neither the
value of Spouse’s income interest in Trust B nor the GST Exempt Trust will be valued at
zero under § 2702.

Ruling 6

Section 2044(a) provides that the value of the gross estate shall include the value of
any property in which the decedent had a qualifying income interest for life. Section
2044(b) provides that § 2044(a) applies to any property if a deduction was allowed with
respect to the transfer of such property to the decedent under § 2056(b)(7) and § 2519
did not apply with respect to a disposition by the decedent of part or all of such property.
PLR-106041-19 7

When Spouse renounces her interest in the property in Trust A, Spouse will be deemed
to have made a transfer of all of the property of Trust A, other than her qualifying
income interest therein, under § 2519. Section 2044(b)(2) provides that § 2044(a) does
not apply to any property if § 2519 applies to the disposition of part or all of that property
prior to Spouse’s death. Therefore, after Spouse disclaims her entire interest in the
property in Trust A, the property in Trust A that is deemed to be transferred under
§ 2519 will not be included in Spouse’s gross estate under § 2044(b)(2).

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.

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

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.

                                       Sincerely,



                                       Melissa C. Liquerman
                                       Melissa C. Liquerman
                                       Branch Chief, Branch 4
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

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