In Revenue Procedure 2016-49, the IRS outlines the circumstances under which it will disregard, for transfer tax purposes, a qualified terminable interest property (QTIP) election that was not needed to reduce the estate tax liability to zero.

Background

QTIP elections are used to reduce the value of a decedent's taxable estate and maximize the amount of estate tax exclusion available to a surviving spouse. Revenue Procedure 2001-38 provided that the IRS would disregard and treat as null for federal estate, gift and generation-skipping transfer tax purposes a QTIP election that was not necessary to reduce the estate tax liability to zero.

Portability elections were introduced in 2010, when Congress amended Section 2010(c) to permit an executor to elect to apply the decedent's deceased spousal unused exclusion (DSUE) amount to the surviving spouse's subsequent transfers, whether as gifts in life or bequests at death. Some executors would elect portability of the DSUE amount under Section 2010(c)(5)(A) whether or not the election was necessary to reduce the estate tax liability to zero.

When issuing final regulations (T.D. 9725) in June 2015 addressing requirements for electing portability of a DSUE amount to the surviving spouse, the IRS stated that it would later issue guidance addressing whether a QTIP election made under Section 2056(b)(7) may be disregarded and treated as null and void (under Revenue Procedure 2001-38) when an executor has elected portability of the DSUE amount. (See Tax Alert 2015-1157.)

Because portability elections are now available, the question arises whether a decedent's estate may "make an otherwise unnecessary QTIP election to maximize the available unused exclusion amount." Revenue Procedure 2016-49 now confirms the procedures under which the IRS will disregard a QTIP election, but it provides that these procedures are unavailable if a portability election was made for the DSUE amount under Section 2010(c)(5)(A).

Law

Generally, no marital deduction is permitted for a terminable interest passing to a surviving spouse (Section 2056(b)(1)). Section 2056(b)(7) provides an exception — the terminable interest rule does not apply to a QTIP.

Because, under Section 2044(a) and (b), the gross estate of a decedent surviving spouse (the second spouse to die) includes the value of any property in which that spouse had a qualifying income interest for life and was permitted a deduction when inheriting the property, making a QTIP election can have estate, gift and generation-skipping transfer tax consequences for the surviving spouse. Further, without the "reverse QTIP" election, available under Section 2652(a)(3), the surviving spouse would be treated as the transferor of the property for purposes of the generation-skipping transfer tax under Section 2652(a)

New revenue procedure

With portability elections now available, an executor may want to elect QTIP treatment for property whether or not the election is necessary to reduce liability for estate tax, because making a QTIP election would reduce the amount of the taxable estate, thus using less of the decedent's applicable credit amount and leaving a larger DSUE amount for the surviving spouse to use.

As a result, the IRS will continue to disregard an unnecessary QTIP election and treat the election as null and void solely "for estates in which the executor neither has made nor has considered to have made the portability election."

Scope

Revenue Procedure 2016-49 treats QTIP elections as void if all three of these requirements are satisfied:

1. The estate's federal estate tax liability was zero, so the QTIP election is unnecessary to reduce federal estate tax liability.

2. The executor did not make and was not considered to have made a portability election under Section 2010(c)(5)(A) and its regulations.

3. The requirements of section 4.02 (Procedural Requirements for Relief to Treat QTIP Election As Void) of Revenue Procedure 2016-49 are satisfied.

Conversely, the revenue procedure does not treat as void "QTIP elections made to treat property as QTIP" in any of these situations:

1. A partial QTIP election was required for a trust to reduce estate tax liability and the executor made the election for more property than was necessary to bring the estate tax liability to zero.

2. A QTIP election was enunciated "in terms of a formula designed to reduce the estate tax to zero."

3. The QTIP election constituted a protective election under Reg. Section 20.2056(b)-7(c).

4. The executor made a portability election in accordance with Section 2010(c)(5)(A), "even if the decedent's DSUE amount was zero based on values as finally determined for federal estate tax purposes."

5. The requirements of section 4.02 (Procedural Requirements for Relief to Treat QTIP Election As Void) of Revenue Procedure 2016-49 are not satisfied.

The IRS further notes that: (1) the procedures set out in Revenue Procedure 2016-49 "must be used in lieu of requesting a letter ruling" and (2) QTIP elections for which relief was granted under Revenue Procedure 2001-38 do not fall within the scope of Revenue Procedure 2016-49.

Implications

Revenue Procedure 2016-49 expands the grounds for automatic relief for invalidating QTIP elections when the election provides no benefit. As IRS user fees for private letter rulings continue their upward march, this revenue procedure comes as welcome news for many taxpayers who can now rely on this procedure for certainty in lieu of the costly and lengthy private letter ruling process.

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