Wills and Trusts

Wyatt, Tarrant & Combs, LLP

Termination of QTIP Trust in Prearranged Transaction

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In Estate of Virginia V. Kite v. Commissioner, T.C. Memo 2013-43, the decedent’s children, as trustees of the QTIP trust for their mother, terminated the QTIP and distributed the assets (a partnership known as “KIC”) to her revocable trust. Two days later, those assets were sold to her children (and their trusts) for private annuities.

The termination of the QTIP trusts and the transfer of the trust assets to the children were treated as a single transaction for §2519 purposes. Pursuant to Treas. Reg. §25.25190-1(f), the decedent disposed of her qualifying income interests, which were traceable from KIC to the QTIP. Thus, the sale of KIC was subject to gift tax to the extent of the fair market value of the entire property subject to the decedent’s qualifying income interest, as of the date of the annuity transaction, less the value of the decedent’s qualifying income interest.

In an unpublished opinion on October 25, 2013 (No. 6772-08), the Tax Court held that the value of the private annuity was acquired for full and adequate consideration, but that there was gift tax owed on account of the termination of the QTIP itself. Combined, the two opinions are confusing and produce little reliable guidance going forward.

Turney P. Berry
Louisville, Kentucky

Author: robmalinesq

I am an estate planning and probate attorney in Memphis, Tennessee.

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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