Estate elections: guidance on QTIP & portability elections.

• Author: Josephs, Stuart R.
• Position: Fed Tax

The 2010 amendment of IRC Sec. 2010(c), allowing an estate's executor to make a portability election under Sec. 2010(c)(5)(A), may influence the decision whether to make a qualified terminable interest property (QTIP) election under Sec. 2056(b)(7). A QTIP election would reduce the decedent's taxable estate and maximize the unused exclusion available for the surviving spouse

The executor of an estate electing portability of the decedent's unused exclusion (deceased spousal unused exclusion, or DSUE) may wish to make a QTIP election regardless of whether the QTIP election is necessary to reduce the estate tax liability to zero.

Observation: Although the QTIP is included in the surviving spouse's estate, it could be sheltered by the DSUE and also would obtain a stepped-up basis for income tax purposes.

Rev. Proc. 2001-38 provided procedures for the IRS to disregard, for estate, gift and generation-skipping transfer (GST) tax purposes, a QTIP election made in cases where the election was unnecessary to reduce the estate tax liability to zero. With the availability of portability elections, this procedure to void QTIP elections may bring into question the ability of an estate to make an otherwise unnecessary QTIP election to maximize the available DSUE.

Rev. Proc. 2016-49, (IRB 2016-42, Oct. 17, 2016), effective Sept. 27. 2016, modifies and supersedes Rev. Proc. 2001-38. Although this revenue procedure confirms the procedures for the IRS to disregard QTIP elections, it excludes from its scope those estates where the executor made a portability election.

Scope of Rev. Proc. 2016-49

This revenue procedure treats as void QTIP elections made in cases where all of the following requirements are satisfied, pursuant to Sec. 3.01 thereof:

1. 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, making this election unnecessary to reduce that tax liability;

2. The estate's executor neither made, nor was considered to have made, the portability election; and

3. Rev. Proc. 2016-49, Sec. 4.02's procedural requirements are satisfied.

This revenue procedure does not treat as void QTIP elections made to treat property as QTIP in cases where:

1. The estate's executor made a portability election, even if the decedent's DSUE was zero based on values as finally determined for federal estate tax purposes;

2. A partial QTIP election was required with respect to a...