Wills and Trusts

Wyatt, Tarrant & Combs, LLP


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Termination of QTIP Trust in Prearranged Transaction

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In an unpublished opinion on October 25, 2013 (No. 6772-08), the Tax Court held that the value of the private annuity was acquired for full and adequate consideration, but that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


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No QTIP Election Unless Necessary to Reduce Estate Tax

If Fred dies in 2011 with a $4,000,000 estate and is survived by his second wife, Mabel, Fred’s estate plan may provide for a QTIP-eligible trust for Mabel’s benefit, remainder to Fred’s children. Although the QTIP election is not necessary in order to zero out Fred’s estate taxes, making a QTIP election could be desirable because of potential increase in basis at Mabel’s subsequent death if the trust assets were included in her estate.

Rev. Proc. 2001-38 precludes the QTIP election unless doing so reduces the estate tax. Thus a change in basis may be achieved only by giving the surviving spouse some modicum of control over the assets to be included in the spouse’s estate (e.g. a testamentary power of appointment in favor of the creditors of her estate). See e.g. PLRs 200407016, 200603004, and 201112001. The original policy was to help taxpayers avoid inclusion in the survivor’s estate of “unnecessary” assets. Such a policy might support allowing a QTIP election to achieve a basis change at the second spouse’s death but there is scant authority to support the argument.

In PLR 201338003 the surviving spouse or executor properly allocated all assets to the credit shelter trust but listed those assets on Schedule M of the 706 and was deemed to have made a QTIP election. The PLR applied Rev. Proc. 2001-38 to void the QTIP election.

Turney P. Berry
Louisville, Kentucky