Magazine article The CPA Journal

Reverse QTIP Election-A True Story

Magazine article The CPA Journal

Reverse QTIP Election-A True Story

Article excerpt

Care must be taken in preparing the Federal estate tax return, particularly with regard to the need to satisfy the exact requirements for making various elections, such as the "QTIP election," and for generation skipping tax purposes, the "reverse QTIP election."

When a decedent makes testamentary bequests for the benefit of grandchildren, either direct or in trust, a generation skipping tax (GST) may apply. In order to mitigate the effect of such a tax, the decedent's executor should allocate the decedent's $1,000,000 statutory GST exemption to such transfer, providing the decedent is the "transferor." To be deemed a transferor there can be no intervening income interests, such as generally is the case of QTIP trusts where the spouse has an income interest in the trust. To remedy this situation, the IRS permits what is commonly known as a "reverse QTIP election" under IRC section 2152(a)(3), making the decedent the transferor. By making such a reverse QTIP election, an allocation of the GST $1,000,000 exemption would be permitted for the decedent.

In a matter that has come to my attention, a Form 706 was filed for an estate and, in error, the reverse QTIP election was not made. As the following actual case history will demonstrate, much was learned from the mistake, and, with some fortune, all turned out well. The facts are as follows:

Mr. G, the decedent, died in May 1993 leaving a surviving spouse, S, and three grandchildren, as well as great grandchildren. An only son, father of the three grandchildren, had predeceased G. Under the terms of G's will, assets were to be allocated first to a marital trust in an amount that would qualify for the marital exemption. The marital trust was in turn divided into marital trust A and marital trust B. Marital trust A was to consist of assets having a value of $1,000,000 or such lessor sum as represents the amount needed to consume any unused portion of the decedent's GST exemption. The balance was to be placed into marital trust B. The income from both marital trusts A and B was payable to S during her life. The remainder of marital trust A was payable to great grandchildren. The remainder of trust B was payable to one of the grandchildren (GC1).

In preparing the estate tax return, Form 706, Schedule M was properly completed, qualifying both marital trusts A and B for the marital exemption.

In order for G to be deemed the "transferor" for purposes of the GST exemption, Schedule R provides a box to be checked to trigger the reverse QTIP election. If such box is not checked, the availability of the decedent's $1,000,000 GST exemption is lost.

In inputting the return into the computer, a mistake was made on Schedule R and the box was not checked. The $1,000,000 GST exemption, however, was correctly allocated to marital trust A. The return was filed showing no tax due, but with the error uncorrected. A closing letter was subsequently issued by the IRS.

The error was later detected, but with in the statutory period for filing the estate tax return. Needless to say, the accounting firm that had prepared the return began reviewing their malpractice policy to see if there was sufficient coverage to protect against the potential GST tax ramifications that might occur.

Under somewhat similar circumstances the IRS had issued a private letter ruling 9641013 granting the petitioner the relief requested, namely to permit a reverse QTIP election. Section 301.9100-1(a) of the Procedure and Administrations Regulation permits the IRS Commissioner to grant an extension of time to make a reverse QTIP election, provided that the statute of limitations has not expired and the request is made within a reasonable time under the circumstances. …

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