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QTIP Elections and Estate Taxes

Posted on: July 21st, 2016
QTIP trustsQualified Terminable Interest Property (QTIP) trusts are an estate planning tool used to provide certain tax benefits to married couples while simultaneously preserving assets for children or other desired beneficiaries. QTIP assets generally qualify for the estate tax marital deduction and the gift tax marital deduction as long as the recipient spouse does not have a terminable interest in the trust. QTIP trusts typically are used to transfer assets that might not otherwise qualify for these deductions due to the grantor spouse’s desire to transfer the property subject to certain restrictions. 

During estate and trust administration, the executor may be able to implement a few measures to help minimize estate tax liability. For surviving spouses, electing portability (i.e. choosing to acquire the unused portion of the deceased spouse’s estate tax deduction, accomplished by filing a federal estate tax return) is often a smart move. However, the surviving spouse is not permitted to process the election themselves; rather, a non-spouse personal representative must elect portability on their behalf. When both portability and QTIP elections are made, the executor should be aware of how the IRS might regard these actions in certain circumstances, particularly in certain cases where the QTIP election may not be recognized.

A 2016 private letter ruling from the Internal Revenue Service provided some guidance regarding the IRS’s position when processing estate tax returns making a QTIP election where such election is not necessary to avoid estate taxation. In IRS PLR 201615004, the IRS stated its position that certain QTIP elections made to reduce estate tax liability were void as they were deemed unnecessary. The private letter ruling found that, in instances where the estate tax liability would have been zero without a QTIP election, the action of making a QTIP election to reduce estate tax liability is rejected. Such rulings may inform taxpayers and estate planning practitioners in designing plans that could later be subject to analysis and similar determination by the IRS.
While individuals should regularly review their tax planning goals, by the time the estate is managed by the executor many opportunities are lost. Executors should be knowledgeable about tax matters, and in cases where they are not familiar with recent rulings, potential spousal elections, and regulation changes, it helps to seek the counsel of a probate attorney.

Additional resources for executors:

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