Monday, January 29, 2007

VOIDING AN UNNEEDED QTIP ELECTION

The estate tax marital deduction avoids estate taxes on assets passing to the surviving spouse of a decedent. If the assets pass to a trust to be held for the benefit of the surviving spouse, and the trust meets the requirements of Code Section 2056(b)(7), an election can be made (a "QTIP election") to qualify such a transfer for the marital deduction. The election is made on a the estate tax return (Form 706) for the decedent.

The QTIP election has some negative tax consequences. For example, at the death of the surviving spouse any remaining assets in the QTIP marital deduction trust are potentially subject to estate taxes in the estate of the surviving spouse.

It is not always necessary for assets passing into a QTIP trust to be subject to a QTIP election. For example, if the decedent has available unified credit to cover some or all of the transfer, a complete QTIP election is not needed to save estate taxes for the decedent's estate. In such a case, the QTIP election should not be made (at least not as to all of such a trust) to avoid the negative aspects of a QTIP trust.

Despite this typical planning, the estates of decedents sometimes make QTIP elections that are not needed. Even though a QTIP election is not needed to save estate tax, it still has legal effect and cannot simply be disregarded by taxpayers just because it wasn't needed.

So what should taxpayers do when an unnecessary QTIP election is made on an estate tax return? Private Letter Ruling 200702018 reminds us that the IRS has provided a relief mechanism for unnecessary elections. In Revenue Procedure 2001-38, the IRS provides that an unnecessary QTIP election will be disregarded if its procedures are followed. To come within the Revenue Procedure the taxpayer must produce sufficient evidence of the lack of need for the QTIP election. For example, the taxpayer may produce a copy of the estate tax return filed by the predeceased spouse's estate establishing that the election was not necessary to reduce the estate tax liability to zero, based on values as finally determined for federal estate tax purposes. Such information, including an explanation of why the election should be treated as void under the Revenue Procedure, should be submitted either with the Form 706 filed for the surviving spouse's estate, or with a request for a private letter ruling submitted at any time prior to filing that Form 706.

PLR 200702018, February 1, 2007
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