Previously taxed property credit.

• Author: Davis, Daniel E.

Introduction

If an individual dies within 10 years of inheriting property, Sec. 2013 may offer some estate tax relief in the form of a "previously taxed property credit." This credit is designed to provide relief from estate taxes that would otherwise be payable when the same property is included in two decedents' estates within a relatively short period of time. However, the credit may also be available for some property that is taxed in only one of the estates.

Assume one spouse dies (H) and leaves property to a qualified terminable interest property (QTIP) trust, which is to pay income to the surviving spouse (W) for her life and then distribute the property to their children. If W passes away following H's death, but before his estate tax return has been filed, the executor of H's estate may be able to obtain a previously taxed property credit for W's estate (as well as obtaining tax savings by equalizing the two estates) by forgoing the Q TIP election. The general idea in this situation is that W has only a life interest in the property passing in trust to her on H's death. If the Q TIP election is not made, the property is taxed as part of H's estate. The value of this property is not included in W's estate; nevertheless, because W's life interest in the property has value at the time W dies, there is a credit available to W's estate (Rev. Rul. 75-550).

Because this credit can result in a substantial tax savings, it is almost always advisable for the tax professional to obtain an extension of time to file the estate tax return of the first spouse to die, and delay filing the return until close to the extended due date, to allow planning should the second spouse die prior to the filing of the return.

Discussion

A very common estate plan for a husband and wife with combined estates of more than $1.2 million is for the first spouse to die to leave property valued at $600,000 to a bypass trust and the balance of his estate to a Q TIP marital trust. On the death of the first to die, the executor will typically make a Q TIP election to have the property in the Q TIP trust qualify for the marital deduction. The effect of the Q TIP election is that the property in the QTIP trust will avoid estate tax in the deceased spouse's estate, but be subject to estate tax in the surviving spouse's estate at that death. Because the value of the property distributed to the QTIP trust is deductible in computing the amount of the deceased spouse's taxable...