Rev. Proc. 2016-49: QTIP Elections Designed to Take Advantage of Portability of the Deceased Spousal Unused Exclusion Amount Will Not Be Disregarded

By:
Kevin Matz, Esq., CPA, LLM (Taxation)
Published Date:
Feb 1, 2017

Revenue Procedure 2016-49 answers in the affirmative the question of whether the IRS will respect a qualified terminable interest property (“QTIP”) election where the executor has elected portability of the deceased spousal unused exclusion (“DSUE”) amount under IRC section 2010(c)(5)(A). 

A “QTIP election” is an election under IRC section 2056(b)(7) to qualify for the estate tax marital deduction a trust for the sole lifetime benefit of a surviving spouse that pays out all of its income annually to the surviving spouse and meets certain other criteria.  “Portability” pertains to the carryover of the DSUE amount of the first spouse to die to the surviving spouse for federal estate and gift tax purposes. It requires that an executor make an election on a timely filed federal estate tax return. Revenue Procedure 2016-49 confirms that a QTIP election will indeed be respected in a portability situation. 

Some historical background is helpful in understanding the significance of this Revenue Procedure. We must turn back the clock to 2001, prior to the advent of portability. In Revenue Procedure 2001-38, the IRS—in an attempt to be helpful to taxpayers—held that a QTIP election is null and void and will be disregarded if it is unnecessary to reduce the amount of the federal estate tax liability. This could occur, for example, where an estate is below the threshold for having to file a federal estate tax return, but the executor nevertheless files the return to commence the running of the statute of limitations. A QTIP election in this context could produce adverse estate, gift, and generation-skipping transfer (GST) tax consequences, including causing a surviving spouse’s subsequent gift of an income interest in a QTIP trust to trigger the rule in IRC section 2519, producing a deemed gift of the principal of the entire QTIP trust for federal gift tax purposes. Against this backdrop, the IRS lent taxpayers a helping hand in Revenue Procedure 2001-38 by assuring them that an unnecessary QTIP election would be disregarded for tax purposes.

The effect of Revenue Procedure 2001-38 became somewhat murky with the advent of portability, which was first introduced for spouses dying on or after Jan. 1, 2011 and became a permanent feature of the federal estate and gift tax laws in 2013. In many instances, the executor will both (1) elect portability of the DSUE amount and (2) make a QTIP election on the estate tax return of the first spouse to die to produce estate tax inclusion (and therefore a step-up in basis to fair market value for income tax purposes) upon the surviving spouse’s death. 

In 2017, a combined amount of $10,980,000 ($5,490,000 per spouse) can be shielded from federal estate tax for a married couple where both spouses are U.S. citizens or residents. Producing estate tax inclusion on the surviving spouse’s death will not necessarily generate any federal estate tax given the magnitude of the exemption—indeed, it could produce a tax-free step-up in basis for income tax purposes, which is highly desirable. If, however, Revenue Procedure 2001-38 caused the QTIP election to be disregarded for estate tax purposes, the portability-based plan of maximizing a tax-free step-up in basis on the second spouse’s death would be frustrated.

Fortunately, Revenue Procedure 2016-49 has come to the rescue.  This new Revenue Procedure modifies and supersedes Revenue Procedure 2001-38, and it provides that a QTIP election made by an executor who has also made a portability election will not be disregarded. 

There is a wrinkle to this Revenue Procedure, as Revenue Procedure 2016-49 will continue to treat as null and void certain QTIP elections that are made in non-portability situations where a number of requirements are satisfied.  These requirements include the submission of specified documentation in connection with

  • a supplemental Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, that is filed for the estate of the predeceased spouse within the applicable statute of limitations period;
  • a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, filed by the surviving spouse; or
  • a Form 706 filed for the estate of the surviving spouse.

Significantly, however, Revenue Procedure 2016-49 confirms that a QTIP election is not treated as null and void if the executor makes a portability election in accordance with IRC section 2010(c)(5)(A). Accordingly, an estate plan for a married couple that is designed to elect portability of the DSUE amount—including maximizing the tax-free step-up in basis upon the death of the surviving spouse (generally to fair market value at the surviving spouse’s date of death)—can proceed, undeterred by any risk that the IRS will disregard the QTIP election. 


matzKevin Matz, Esq., CPA, LLM, is the managing attorney of the law firm of Kevin Matz & Associates PLLC, with offices in New York City and White Plains, N.Y. His practice is devoted principally to domestic and international estate and tax planning and he is a fellow of the American College of Trust and Estate Counsel (ACTEC). Mr. Matz is also a certified public accountant and a past chairman of the estate planning committee of the NYSSCPA. He writes and lectures frequently on estate and tax planning topics. He can be reached by email at kmatz@kmatzlaw.com or by phone at 914-682-6884.

 
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