If any exemption remained, it would be allocated to the marital bequest to avoid wasting it.
However, because the marital bequest to the surviving spouse will be included in his or her estate
at his or her death, the surviving spouse is treated
as the transferor of that property. The remaining
exemption of the first spouse to die cannot be allocated effectively to the trust. The GST allows couples to plan around this problem. A QTIP trust can
be used to avoid wasting any of the GST exemption of the first spouse to die, and that spouse’s executor can make a “reverse QTIP election” for the
trust. The reverse QTIP election causes the spouse
creating the trust to be treated as the transferor for
GST tax purposes. The executor can then allocate
to the QTIP trust that portion of the decedent’s
GST exemption remaining after the allocation to
the nonmarital trust.
A reverse election must be made as to 100
percent of a QTIP trust. Thus, if the executor has
$120,000 of GST exemption left and a QTIP trust
that exceeds $120,000 in value, the executor will
not want to make a reverse QTIP election as to the
whole trust. Doing so will result in a partially GST-exempt trust, one to which the surviving spouse
cannot allocate GST exemption at his or her death.
Therefore, the estate plan needs to provide for the
splitting of the QTIP trust. This is sometimes known
as a tripartite marital plan or an A/A-B plan.
n EXAMPLE: H dies with an estate of $4.5 million in 2009. Because H used $500,000 of his $1
million lifetime exemption to shelter taxable gifts to
his children during life, the credit shelter trust will
be funded with $3 million. After allocating $3 million of GST exemption to the credit shelter trust,
H’s executor, if a QTIP marital deduction trust is
used, would allocate the remaining $500,000 of
GST exemption to an exempt QTIP trust funded
with $500,000 (for which the reverse QTIP election
is made). The $1 million remaining would be allocated to a nonexempt QTIP trust.
In addition, because the GST exemption and
the estate tax applicable exclusion amount are the
same, ($3.5 million) if a decedent uses GST exemption during life, there may be situations in which
the family trust is funded with an amount greater
than the GST exemption. In those cases two family
trusts, one GST exempt and one non-GST exempt,
will need to be created.
n EXAMPLE: Assume that H, who died in 2009
with an estate of $3.8 million, had used $200,000
of GST exemption during life in conjunction with
annual exclusion gifts to a generation-skipping irrevocable insurance trust. His executor would want
two family trusts to be created, one a $3.3 million
GST-exempt trust and the other a $200,000 nonexempt trust. There would be a single nonexempt
marital trust with $300,000.
The IRS does permit the executor to divide a
single trust into two trusts, but it can be done only
pursuant to (a) a court reformation, (b) statutory
authority, or (c) a direction or authorizing language in the governing instrument. [See Treas. Reg.
Section 26.2654-1(b).] Properly drafted GST provisions will enable the executor or trustee to divide a
QTIP trust and create a second QTIP trust that is
entirely exempt from GST tax, or to divide a family trust into two trusts.
Under Section 2642(a)( 3) it is now possible to
split a trust after the GST exemption has been allocated, but if a reverse QTIP election is planned, the
QTIP trust should be split before, so the election
can be made only as to the portion of the trust to
which the descendant’s GST exemption will be applied. Otherwise, the surviving spouse would not
be able to allocate GST exemption to the remaining marital trust property at his or her death.
The estate plans of many wealthy clients provide that all GST-exempt property remaining at the
death of the surviving spouse will be retained in
GST-exempt trusts for the lives of the children and
then pass to grandchildren, with all nonexempt
property passing outright to the children. This
plan often was conceived based on a $1 million
GST exemption. Clients may need to rethink the
allocation given the increase in the GST exemption
amount.
n EXAMPLE: Assume that H and W’s combined
estates remaining at the second death, after estate
tax, have a value of $8 million. All GST-exempt
property will remain in trust for the lives of their
children. At the time they conceived the plan, H and
W thought of it as providing that about one-fourth
of the available assets ($2 million, both of their
then-$1 million GST exemptions) would remain
in trust, and the rest would pass outright to their
children. In 2009, the plan would result in $7 million remaining in GST-exempt trusts and only $1
million being distributed outright to the children.
H and W might want to consider basing the allocation between trusts and outright distributions on
percentages rather than the amount of GST-exempt
property.
