With portability, the estate tax concerns of most clients have been alleviated. However, in some cases, the generation skipping transfer tax (“GSTT”) problem remains unsolved, because the portability provisions of Internal Revenue Code (“IRC”) § 2010(c) do not port or transfer the GST exemption of the deceased spouse (“Decedent”) to the surviving spouse (“Survivor”).
Portability and its new developments have caused many estate planners to move away from drafting the previously oft used “A-B trust” or “two trusts.” Instead, estate planners have increasingly employed the disclaimer trust – a trust where all of the trust assets stay in one trust unless the Survivor decides for estate tax or non-tax reasons to disclaim assets to the equivalent of a bypass trust. Because of portability, the disclaimer trust will satisfy the estate tax objectives of many married clients without the necessity of creating an “A-B trust.” However, the disclaimer trust will not fully satisfy the needs of every client. This is particularly the case for those clients who may be subject to the GSTT.
For these clients instead of employing the pure disclaimer trust, they can either revert back to using the traditional “A-B” trust or consider creating a QTIP trust and making a reverse QTIP election. Depending on the nature of the client’s assets and the domiciliary of the client, however, it may be more advantageous from an income tax perspective to avoid the bypass trust in the traditional “A-B” trust regime. In these circumstances, use of a QTIP trust with a reverse QTIP election could be a fruitful solution.
By making a reverse QTIP election under IRC § 2652(a)(3) over a properly executed QTIP trust (with an inclusion ratio of zero), the Decedent is deemed to be the transferor of the assets passing under the QTIP trust for GSTT purposes. In other words, no QTIP election is deemed to have been made for purposes of GSTT. Therefore, the Decedent’s GSTT exemption can be allocated to the QTIP trust even though the trust is includable in the Survivor’s estate for estate tax purposes. Effectively, then, the Decedent is able to port his or her GSTT exemption to the Survivor (to the extent the QTIP trust is funded). In this way, married clients who may be subject to GSTT may avail themselves to the benefits of portability while also maximizing their GSTT exemption. This solution may result in greater usage of the reverse QTIP election.
-Attorney Michael D. Lum