QTIP Election Permitted Together With Portability

Under Rev. Proc. 2001-38, to protect surviving spouses from the adverse tax consequences of an unnecessary qualified terminable interest property (QTIP) election, the IRS generally treated a QTIP election as null and void when the election did not reduce the estate tax liability of an estate. New Rev. Proc. 2016-49 provides procedures under which the IRS will continue to disregard unnecessary QTIP elections and treat them as null and void. However, it will treat a QTIP election as valid in certain situations, including where an executor of an estate makes a portability election under Sec. 2010(c)(5)(A) to transfer the decedent’s unused applicable exclusion amount (DSUE).

In a comment letter on the IRS 2016—2017 Priority Guidance Plan dated May 12, 2016, the AICPA recommended that the IRS take this action, asking for the IRS to “[p]rovide guidance, such as a revenue procedure, . . . regarding the validity of a QTIP election on an estate tax return filed only to elect portability.”

Under Sec. 2056(a), the value of a taxable estate is determined by deducting from the value of the gross estate an amount equal to the value of any interest in property that passed from the decedent to the surviving spouse. However, Sec. 2056(b)(1) prohibits a marital deduction for an interest passing to the surviving spouse that is a “terminable interest,” meaning it will terminate or fail on the lapse of time or on the occurrence of an event or contingency or on the failure of an event or contingency to occur, and on termination, an interest in the property passes to someone other than the ­surviving spouse.

QTIP is an exception to this rule. QTIP is treated as passing to the surviving spouse and no one else. Under Sec. 2056(b)(7)(B)(i), QTIP is property that passes from the decedent, in which the surviving spouse has a qualifying income interest for life, and to which an election under Sec. 2056(b)(7)(B)(v) applies. However, a QTIP election can have estate, gift, and generation-skipping transfer (GST) tax consequences for the surviving spouse.

As a result of the serious tax consequences of QTIP elections, to protect against unnecessary QTIP elections, Rev. Proc. 2001-38 provided that any unnecessary QTIP election would be null and void. According to the IRS, “Rev. Proc. 2001-38 was premised on the belief that an executor would never purposefully elect QTIP treatment for property if the election was not necessary to reduce the decedent’s estate tax liability.” One example was where the value of the taxable estate, before considering the marital deduction, was less than the applicable exclusion amount so that no estate tax would have been imposed.

However, this rule was developed before the enactment of the portability rules, which apply to the estates of people who died after 2010 and whose executors elect the treatment by filing a timely estate tax return. The existence of the portability election means that estates may want to make QTIP elections to increase the amount of the DSUE credit available to the surviving spouse to offset the surviving spouse’s gift or estate tax liability.

Under Rev. Proc. 2016-49, a QTIP election will be treated as valid where:

• A partial QTIP election was required to reduce the estate tax liability and the executor made the election with respect to more trust property than was necessary to reduce the estate tax liability to zero;
• The QTIP election was stated in terms of a formula designed to reduce the estate tax to zero;
• The QTIP election was a protective election under Regs. Sec. 20.2056(b)-7(c);
• The executor made a portability election, even if the decedent’s DSUE amount was zero; or
• The procedural requirements in the revenue procedure that must be met for the IRS to treat a QTIP election as void are not satisfied.

The revenue procedure treats a QTIP election as void where:

• The estate’s federal estate tax liability was zero, regardless of the QTIP election, based on values as finally determined for federal estate tax purposes, thus making the QTIP election unnecessary to reduce the federal estate tax liability;
• The executor of the estate neither made nor was considered to have made the portability election; and
• The procedural requirements listed in the revenue procedure that must be met for the IRS to treat a QTIP election as void are satisfied.