Estate gets extra time to make QTIP and "reverse" QTIP elections its attorney botched on the estate tax return

Plain-English summary

When a married person dies, an estate can defer estate tax on assets left in trust for the surviving spouse by making a "QTIP" election (qualified terminable interest property) under section 2056(b)(7), which treats the trust property as qualifying for the estate tax marital deduction. For generation-skipping transfer (GST) tax planning, the estate can also make a "reverse" QTIP election under section 2652(a)(3), which keeps the deceased spouse treated as the transferor of that trust so the deceased spouse's GST exemption can shelter it. Here the decedent's revocable trust set up a marital (QTIP) trust and directed that GST-exempt and non-exempt shares be split as needed. The attorney who prepared the estate tax return (Form 706) filed it on time but made mistakes: the QTIP trust assets were listed in the wrong section of Schedule M, and no Schedule R was attached, so no QTIP election, no trust severance, and no reverse QTIP election actually got made. The estate asked the IRS for a late-election extension under Treasury Regulation section 301.9100-3. Because the estate reasonably relied on a tax professional who failed to make the elections (a situation the regulation treats as reasonable and good faith) and relief would not prejudice the government, the IRS granted 120 days to make the QTIP election, sever the QTIP trust into GST-exempt and GST-non-exempt trusts, and make the reverse QTIP election on a supplemental Form 706.

Ruling snapshot

• Question: Should the estate get an extension of time to make a QTIP election, sever the marital trust for GST purposes, and make a "reverse" QTIP election that its attorney failed to make on the timely estate tax return?
• Outcome: approved (120-day extension under Treas. Reg. § 301.9100-3)
• Key authorities: IRC §§ 2056(b)(7) (QTIP), 2652(a)(3) (reverse QTIP), 2631–2632 (GST exemption); Treas. Reg. §§ 20.2056(b)-7, 26.2652-2, 301.9100-3 (including the reliance-on-a-tax-professional standard in 301.9100-3(b)(1)(v))

Full text (IRS public release)

 Internal Revenue Service                                      Department of the Treasury
                                                               Washington, DC 20224

 Number: 202242002                                             Third Party Communication: None
 Release Date: 10/21/2022                                      Date of Communication: Not Applicable
 Index Number: 2056.07-00, 2632.03-00,
               9100.00-00                                      Person To Contact:
                                                               -------------------------- ID No. ----------------
 ----------------------------------                            Telephone Number:
 -------------------------                                     --------------------
 ----------------------------------                            Refer Reply To:
 --------------------------                                    CC:PSI:B04
                                                               PLR-102162-22
 --------------------------------------                        Date:
                                                               July 22, 2022




 Legend
 Decedent               =                 ------------------------------------------
 Spouse                 =                 ----------------------------------------------
 Attorney               =                 ----------------------
 Trust                  =                 ---------------------------------------------------
 Date 1                 =                 -------------------
 Date 2                 =                 ------------------
 Date 3                 =                 --------------------------

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

       This letter responds to a letter from your authorized representative dated January
21, 2022, and subsequent correspondence, 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 a “reverse” QTIP election under § 2652(a)(3) of the
Code for the exempt trust.

        The facts and representations submitted are summarized as follows:

       Decedent and his spouse, Spouse, created Trust, a revocable trust, on Date 1.
Trust was amended on Date 2. Decedent died on Date 3, survived by Spouse and
Decedent’s children.

       Section 3.02 of Trust provides, in relevant part, that after the death of the
deceased settlor, the surviving settlor may at any time amend, revoke, or terminate the
Survivor’s Trust (a trust created for the benefit of the surviving settlor). All other trusts
are to become irrevocable and not be subject to amendment after the death of the
deceased settlor.

        Section 5.02 provides, in relevant part, that upon the death of the deceased
settlor, the trustee is to divide the trust estate into three shares, hereinafter referred to
PLR-102162-22                                  2

as the Survivor’s Share, the Marital Deduction Share, and the Nonmarital Share. The
Survivor’s Share is to consist of the portion of the trust estate consisting of the surviving
settlor’s one-half interest in the settlors’ community property, the surviving settlor’s
one-half interest in the deceased settlor’s quasi-community property, and all the
surviving settlor’s separate property and quasi-community property.

       Section 5.02 further provides, in relevant part, that the Marital Deduction Share is
to consist of assets having a value equal to the minimum amount necessary to eliminate
any federal estate tax at the death of the deceased settlor, taking into account: (1) the
net value of all other property that passes or has passed to the surviving settlor under
the trust instrument, the will of the deceased settlor, or otherwise, and that qualifies for
the federal estate tax marital deduction; (2) all federal estate tax deductions actually
allowed other than the marital deduction; (3) the unified credit available to the estate of
the deceased settlor; and (4) the credit for state death taxes available to the estate of
the deceased settlor, to the extent that the use of that credit does not result in or
increase any death tax payable to any state; and (5) any other allowable credits
available to the estate of the deceased settlor, but only to the extent that those credits
do not disqualify this gift from receiving the marital deduction.

        Section 5.02 further provides, in relevant part, that the Marital Deduction Share is
to be held, administered, and distributed according to the terms of the QTIP Trust as set
forth in Section 5.07 of Trust; and the Nonmarital Share is to consist of all assets not
allocated to the Survivor’s Share or the Marital Deduction Share. The Nonmarital Share
is to be held, administered, and distributed according to the terms of the Bypass Trust
as set forth in Section 5.08.

         Section 5.07 provides, in relevant part, that the trustee is to hold, administer, and
distribute the assets of QTIP Trust as follows: if the executor has elected that the trust
qualify for the federal estate tax marital deduction under § 2056(b)(7), the trustee is to
thereafter administer the trust in a manner that will not invalidate the election or
disqualify the property in which the surviving settlor has a qualifying income interest for
life. If an election is made under § 2056(b)(7) to qualify some but not all of the property
allocated to the QTIP Trust for the federal estate tax marital deduction, the QTIP Trust
is to be divided into two separate trusts pursuant to the terms of the election. The
trustee is to pay to or apply for the benefit of the surviving settlor, so long as the
surviving settlor lives, the entire net income of the trust, in monthly or other convenient
installments, but not less often than annually. The trustee is to distribute to or apply for
the benefit of the surviving settlor, for life, as much of the principal of the trust as the
trustee deems necessary for his or her health, education, support, and maintenance.

        Section 5.07 further provides, in relevant part, that on the death of the surviving
settlor, the trustee may pay the taxes, debts, and expenses arising on his or her death.
The net income of the trust then accrued, but uncollected, is to be distributed to the
estate of the surviving settlor. The trustee is to distribute the balance of the principal of
the QTIP trust in the manner specified in section 5.08.
PLR-102162-22                                 3


        Section 5.08 provides, in relevant part, that the trustee is to hold, administer, and
distribute the assets of the Bypass Trust as follows: the trustee is to pay to or apply for
the benefit of the surviving settlor, for life, in monthly or other convenient installments,
but not less often than annually, as much of the net income of the trust, and as much of
the principal of the trust, as the trustee deems necessary for his or her health,
education, support, and maintenance.

        Section 5.08 further provides, in relevant part, that on the death of the surviving
settlor, the trustee is to divide the trust property into as many shares of equal market
value as are necessary to create one share for each of the children of the settlors who
survives the surviving settlor and the issue who survive the surviving settlor of each
child who predeceases the surviving settlor. Each share for a surviving child is to be
distributed outright to that child.

        Section 5.13 provides, in relevant part, that upon written notification by the
deceased settlor’s executor that the executor intends to allocate any part of the
generation-skipping transfer (GST) tax exemption that is available to the deceased
settlor under § 2631(a) to some but not all of the property in any trust to which this
paragraph applies, the trustee shall or may divide that trust into two separate trusts, to
be designated as the Exempt Trust and the Non-Exempt Trust.

        Spouse, while serving as executor of Decedent's estate, hired Attorney to
prepare Decedent's Form 706, United States Estate (and Generation-Skipping Transfer)
Tax Return. Attorney prepared and timely filed the Form 706. On Schedule M of Form
706, Attorney incorrectly listed the assets of the QTIP Trust in the “All other property”
section (Section B) instead of the “QTIP property” section (Section A). Further, Attorney
failed to attach Schedule R and thus was not able to divide QTIP trust into exempt and
non-exempt trusts and was unable to make a “reverse” QTIP election over the exempt
marital trust.

You have requested the following rulings:

    1. An extension of time under § 301.9100-3 to make a QTIP election under
      § 2056(b)(7) with respect to the QTIP Trust.

    2. An extension of time under § 301.9100-3 and § 2642(a)(3) to sever QTIP Trust
      into two trusts, GST Exempt QTIP Trust and GST Non-Exempt QTIP Trust.

    3. An extension of time under § 301.9100-3 to make a “reverse” QTIP election
      under § 2652(a)(3) with respect to the GST Exempt QTIP Trust.

LAW AND ANALYSIS
PLR-102162-22                                   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, 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)(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 as defined in § 2056(b)(7)(B)(ii); 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.

      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)(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.
PLR-102162-22                                 5

        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.

        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 Date 3, 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 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 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 relevant 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) of the Generation-Skipping Transfer Tax Regulations
provides, in relevant 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.
PLR-102162-22                                6

        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 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 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 the representations made, we conclude that
the requirements of § 301.9100-3 have been satisfied. Therefore, the executor of
Decedent's estate is granted an extension of time of 120 days from the date of this letter
to make a QTIP election with respect to the property of QTIP Trust. The executor of
Decedent’s estate is also granted an extension of time of 120 days from the date of this
letter to sever QTIP Trust into two trusts, GST Exempt QTIP Trust and GST
Non-Exempt QTIP Trust, and to make a “reverse” QTIP election under § 2652(a)(3) with
respect to the GST Exempt QTIP Trust. These elections should be made on a
supplemental Form 706 filed with the Internal Revenue Service Center at the following
address: Internal Revenue Service Center, Attn: E&G, Stop 824G, 7940 Kentucky
Drive, Florence, KY 41042-2915. A copy of this letter should be attached to the
supplemental Form 706.

      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.

      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.
PLR-102162-22                               7


      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)


      Enclosure
            Copy for § 6110 purposes




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