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Short End. In a recent case, the taxpayer came out on the short end of a decision involving a QTIP Trust
(Qualified Terminable Interest Property). A common estate planning technique where one spouse has
considerably more wealth than the other, and the spouses wish to equalize the Federal Estate Tax Lifetime
Exemption or Credit, is to establish a inter-vivos (lifetime) QTIP Trust so that property of the wealthy spouse is
shifted to the taxable estate of the less-wealthy spouse, with a predetermined disposition of the property after
the death of less-wealthy spouse. Another common technique, utilizing a QTIP Trust is to establish a QTIP
Trust that takes effect at death, either by Will or Revocable Trust. In fact, most A-B Trust formulas involve QTIP
Trusts.
Big Hooker. The big hooker in the QTIP provision is that an affirmative election by a taxpayer or a taxpayer’s
estate is required to obtain QTIP treatment! In the Wells Fargo case, the wealthy donor failed to file a gift tax
return with the appropriate election, the marital deduction was denied and the donor’s estate was charged
with gift taxes on the Trust set up during the donor’s lifetime. Some practitioners, including some who do tax
returns, approach the marital deduction in an off-hand manner. They think that because there is no tax, the
appropriate returns don’t have to be filed, or don’t have to be filed in a timely manner (or else don’t have to be
filed with attention to the appropriate formalities). The QTIP treatment for the marital deduction is not
automatic!
History. Until the passage of the QTIP legislation, the marital deduction was allowed only for outright transfers
to a spouse or transfers where the spouse had some sort of virtual control over the property. If the spouse’s
interest was "terminable", that is, if the spouse had no such control, the marital deduction was denied. The
QTIP legislation created a special exception for a "qualified terminable interest", hence, the name QTIP. In
the lifetime situation, the objective of the Trust is to qualify for the marital deduction, and the election is
mandatory, says the Court of Appeals in Wells Fargo. If the QTIP Trust is established at death, the election is
also critical because there is generally an estate tax reason for setting up a QTIP Trust in the first place. It is
easy to slide by if there is no tax due. Sometimes the Form 706 Estate Tax Return is not even filed because
the practitioner thinks that it is a no-tax estate. There may be financial planning reasons to either claim or not
claim the marital deduction and the taxable estates of both spouses need to be examined before that
decision is made.
In the typical A-B Trust formula, the decision may be made by the trust language, but in many other cases the
trust provisions for the A-B trusts are so similar that post-death estate planning can be used to make sure
that no unnecessary estate tax is paid at either death. (In one recent case we paid some tax at the first death
in order to claim a credit on the tax due at the second death, resulting in significant savings to the heirs.)
Bottom Line. This is an important point for tax return preparers to remember. For financial advisors who are
not the technicians, you should make sure your clients have competent advisors, attorneys and CPA’s who
can make sure that these small points don’t get missed, to the extreme discomfort and expense of your
client. Wells Fargo points out that proper returns have to filed even if no tax is due, and that lack of attention to
details can be costly.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| April 2003 MARITAL DEDUCTION - LOST BUT NOT FORGOTTEN by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |