Purchase of QTIP remainder interest for FMV is a gift.

• Author: Barton, Peter C.
• Position: Qualified terminable interest property, fair market value

In Rev. Rul. 98-8, the IRS ruled that a surviving spouse purchases the remainder interest in qualified terminable interest property (QTIP) makes a gift even though the surviving spouse pays fair market value (FMV) for the remainder interest. The amount of the gift is the greater of the remainder interest or the property given for it. The rationale for this ruling is that, if the surviving spouse does not purchase the remainder interest, it will nevertheless be included in the surviving spouse's gross estate. If the surviving spouse purchases the remainder interest, however, the property given in exchange for it will not be in the gross estate; thus, this property must be subject to the gift tax.

In calculating the taxable estate, Sec. 2056(a) allows a marital deduction for property passing to the surviving spouse. The property is then taxed in the estate of the surviving spouse at death under Sec. 2033. Sec. 2056(b)(1) prohibits a marital deduction for terminable interest property, such as an income interest in property, because terminable interest property is not included in the estate of the surviving spouse. Sec. 2056(b)(7) provides an exception for QTIP. The estate of the first spouse to die receives a marital deduction for QTIP, even though the will of this spouse determines who receives the remainder interest. To qualify for this exception, the surviving spouse must receive all of the income from the property payable at least annually, and the executor of the estate of the first spouse to die must make a QTIP election. If these requirements are satisfied, the property is included in the surviving spouse's estate under Sec. 2044. The objective of the marital deduction is therefore to defer the estate tax and not to allow property to escape taxation completely.

Sec. 2519 specifies that any disposition of all or part of a Sec. 2056(b)(7) QTIP income interest is treated as a gift of the entire remainder interest. The legislative history broadly interprets "disposition" to include disposition "by gift, sale, or otherwise." Sec. 2511 (a) applies the gift tax to transfers regardless of their form or the nature of the property. Sec. 2512(b) specifies that if property is transferred for less than FMV, the excess of FMV over the consideration received is a gift.

Example: D's will established a trust that pays all income annually to S for life, with the property to be distributed to D's children after S's death. S was not given a general power...