Private Letter Rulings - Extensions Granted to Allocate GSTT Exemption, Make Reverse QTIP Election
GiftLaw Note:
Decedent created his will on date 1, executed a codicil on date 2 and died, survived by Spouse and Sister, on date 3. Decedent's will and applicable codicil provided for the creation of Trust 1. Trustee is to pay the net income of Trust 1 to Spouse during his lifetime. Upon Spouse's death, trustee is to pay the net income of Trust 1 to Sister, during her lifetime. Upon Sister's death, remaining property in Trust 1 is to be allocated per stirpes to Sister's living decedents by distributing the property to Trust 2, a trust created by Sister, to be held for her descendents. The executor of Decedent's estate timely filed Form 706, Schedule M and made a qualified terminable interest property (QTIP) election under Sec. 2056(b)(7). However, the executor did not make the "reverse" QTIP election or allocate the unused portion of Decedent's GST exemption to Trust 1. Decedent's estate requested an extension of time to make a "reverse" QTIP election, as well as allocate the unused GST to Trust 1.
Secs. 301.9100-1 through 301.9100-3 provide the standards a Commissioner will use to determine the granting of extensions. Under Sec. 301.9100-3, requests for relief will be granted if a taxpayer is deemed to have acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government. Based on the facts submitted and representations made, the Service concluded the requirements of Sec. 301.9100-3 were satisfied and Decedent's estate was granted a 60-day extension to make a "reverse" QTIP election. The Service held Decedent's remaining GST exemption will be allocated to Trust 1 under Sec. 2632(e)(1).
Secs. 301.9100-1 through 301.9100-3 provide the standards a Commissioner will use to determine the granting of extensions. Under Sec. 301.9100-3, requests for relief will be granted if a taxpayer is deemed to have acted reasonably and in good faith and the grant of relief will not prejudice the interests of the Government. Based on the facts submitted and representations made, the Service concluded the requirements of Sec. 301.9100-3 were satisfied and Decedent's estate was granted a 60-day extension to make a "reverse" QTIP election. The Service held Decedent's remaining GST exemption will be allocated to Trust 1 under Sec. 2632(e)(1).
This responds to your letter, dated April 16, 2009, submitted on behalf of Decedent's estate, requesting an extension of time under §§ 301.9100-1 and 301.9100-3 of the Procedure and Administration Regulations to make a "reverse" qualified terminable interest property (QTIP) election under § 2652(a)(3) of the Internal Revenue Code and to allocate Decedent's generation-skipping transfer (GST) tax exemption.
The facts submitted are as follows:
Decedent executed her will on Date 1, and a codicil to her will on Date 2. Decedent died on Date 3.
Article Sixth of Decedent's will, as amended by the codicil, provides, in relevant part, for the creation of Trust 1. The trustee of Trust 1 is to pay the net income of Trust 1 to Spouse, Decedent's spouse, for and during his natural lifetime, in convenient installments at least as often as semi-annually. Upon Spouse's death, the trustee of Trust 1 is to pay the net income of Trust 1 to Sister, Decedent's sister, for and during her natural lifetime, in convenient installments at least as often as semi-annually. Upon Sister's death, the remaining property in Trust 1 is to be allocated per stirpes among Sister's living descendants; provided that any property so allocated to a descendant of Sister shall instead be distributed to the trustee of the trust, created by Sister and known as Trust 2, to be added to the trust then held and named for that descendant.
On Date 4, Decedent's Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return was timely filed. On Schedule M, the executor elected to treat the assets of Trust 1 as qualified terminable interest property (QTIP). However, the "reverse" QTIP election was not made over Trust 1.
It is represented that none of Decedent's $1,000,000 exemption was allocated before Decedent's death. It is further represented that Decedent made transfers to skip persons in an amount totaling $c. Thus, $b ($1,000,000 - $c) of Decedent's exemption was not allocated upon her death. It is further represented that the value of Trust 1 on Decedent's death was $a, which is less than $b. Spouse died on Date 5.
You have requested the following rulings:
1. An extension of time under §§ 301.9100-1 and 301.9100-3 for Decedent's estate to make a "reverse" QTIP election under § 2652(a)(3) for Trust 1.
2. The automatic allocation rules of § 2632(e) will operate to cause the unused portion of Decedent's GST exemption to be allocated to Trust 1.
LAW AND ANALYSIS
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)(1) disallows this deduction where, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail.
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; 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 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. Under § 2642(a)(1), the inclusion ratio with respect to any property transferred in a generation-skipping transfer is generally defined as the excess of 1 over the "applicable fraction." The applicable fraction, as defined in § 2642(a)(2) is a fraction, the numerator of which is the amount of GST exemption under § 2631 allocated to the trust (or to property transferred in a direct skip), and the denominator is the value of the property transferred reduced by the sum of any federal estate tax or state death tax actually recovered from the trust attributable to such property and any charitable deduction allowable under § 2055 or § 2522 with respect to such property.
Section 2631(a), as in effect on Decedent's date of death, provides that, for purposes of determining the inclusion ratio, every individual shall be allowed a GST exemption of $1,000,000 that may be allocated by the 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 2632(e)(1) (former § 2632(c)(1) at the time of Decedent's death) provides that, in general, any portion of an individual's GST exemption which has not been allocated within the time prescribed by § 2632(a) shall be deemed to be allocated as follows: (A) first, to property which is the subject of a direct skip occurring at such individual's death, and (B) second, to trusts with respect to which such individual is the transferor and from which a taxable distribution or a taxable termination might occur at or after such individual's death.
Section 26.2632-1(d)(2) of the Generation-Skipping Transfer Tax Regulations provides that a decedent's unused GST exemption is automatically allocated on the due date for filing the Form 706, or Form 706NA, to the extent not otherwise allocated by the decedent's executor on or before that date. Unused GST exemption is allocated pro rata (subject to the rules of § 26.2642-2(b)), on the basis of the value of the property as finally determined for purposes of chapter 11 (chapter 11 value), first to direct skips treated as occurring at the transferor's death. The balance, if any, of unused GST exemption is allocated pro rata (subject to the rules of § 26.2642-2(b)) on the basis of the chapter 11 value of the nonexempt portion of the trust property to trusts with respect to which a taxable termination may occur or from which a taxable distribution may be made. No automatic allocation of GST exemption is made to a trust that will have a new transferor with respect to the entire trust prior to the occurrence of any GST with respect to the trust. The automatic allocation is irrevocable.
Section 2642(a)(1) provides that, generally, the inclusion ratio with respect to any property transferred in a GST is the excess of 1 over the "applicable fraction." With respect to a GST that is not a direct skip, § 2642(a)(2) provides that, in general, the applicable fraction is a fraction the numerator of which is the amount of the GST exemption under § 2631 allocated to the trust and the denominator of which is the value of the property transferred to the trust.
Section 2652(a)(1) provides that for purpose 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 pertinent 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 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.
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 6 months except in the case of a taxpayer who is abroad), under all subtitles of the Internal Revenue 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 due 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. Accordingly, an extension of time of 60 days from the date of this letter is granted to make a "reverse" QTIP election with respect to Trust 1. As a result of the "reverse" QTIP election with respect to Trust 1, Decedent's remaining GST exemption, after taking into account the amount automatically allocated to Children's Trust and the direct skips, will be allocated to Trust 1 under § 2632(e)(1).
The "reverse" QTIP election should be made on a Supplemental Form 706 filed with the Internal Revenue Service Center, Cincinnati, Ohio 45999. A copy of this letter should be attached to the form. A copy is enclosed for this purpose.
In accordance with the Power of Attorney on file with this office, a copy of this letter is being sent to your authorized representatives.
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.
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.
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,
Curt G. Wilson
Associate Chief Counsel
Passthroughs & Special Industries