Formula! Formula! Formula! (defining bequests in terms of remaining unified credit)

• Author: Rhine, David S.

Occasionally, a ruling is of interest not only because of the point of law considered - but also because of the insight provided to the details of other taxpayers' situations. Such was the situation in Rev. Rul. 92-26.

In estate planning jargon, the unified credit equivalent amount is almost synonymous with $600,000. Likewise, the generation-skipping transfer (GST) exemption is almost as closely linked with $1 million. However, if an individual has made prior transfers, he may have used up part of this credit and/or exemption.

Yet it is quite common to see a will that provides for the bequest of a fixed dollar amount, such as $600,000 or $1 million, when it may be assumed that it was the intention of the testator (and the will's drafter) to use the maximum unified credit or GST exemption and not necessarily to make a bequest of these dollar amounts. However, bequests exceeding the credit equivalent or exemption may generate unexpected tax if the full credit or exemption is not available.

Rev. Rul. 92-26 described a decedent's (D's) estate with a $600,000 pecuniary bequest to a child (C), a reverse qualified terminable interest property (QTIP) trust for $1 million, and a QTIP residuary trust for the balance of the estate. The $1 million reverse QTIP trust would terminate at the spouse's (S's) death and be distributed to C's child, G. The residuary QTIP trust would be distributed to C if C were alive at S's death. If C were not alive, this trust would be distributed to G. However, at D's death, his unused GST exemption was only $800,000. C predeceased S. On S's death, both trust's were distributed to G.

The primary issue was one of generation assignment for the trust's beneficiaries. Identification of the transferor and timing of the bequests were important because the GST tax's "predeceased child rule" (Sec. 2612(c)(2)) applies only to direct skips. Results: D was treated as the transferor of the $1 million reverse QTIP trust because of a reverse QTIP election made under Sec. 2652(a)(3). The predeceased child rule did not apply, since the distribution to G from this trust after S's death was not a direct skip from D because the distribution was not subject to an estate or gift tax on D at the time of the distribution (which is required by Sec. 2612(c)(1)).

Although this distribution to G was subject to S's estate tax at the time of the distribution, the distribution was not a direct skip from S because S was not considered the transferor of...