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By Max Wasser, CPA, Wasser Leb & Lipstein

Care must be taken in preparing the Federal estate tax return, particularly with regard to the need to satisfy the exact requirements for making various elections, such as the "QTIP election," and for generation skipping tax purposes, the "reverse QTIP

When a decedent makes testamentary bequests for the benefit of grandchildren, either direct or in trust, a generation skipping tax (GST) may apply. In order to mitigate the effect of such a tax, the decedent's executor should allocate the decedent's $1,000,000 statutory GST exemption to such transfer, providing the decedent is the "transferor." To be deemed a transferor there can be no intervening income interests, such as generally is the case of QTIP trusts where the spouse has an income interest in the trust. To remedy this situation, the IRS permits what is commonly known as a "reverse QTIP election" under IRC section 2652(a)(3), making the decedent the transferor. By making such a reverse QTIP election, an allocation of the GST $1,000,000 exemption would be permitted for the decedent.

In a matter that has come to my attention, a Form 706 was filed for an estate and, in error, the reverse QTIP election was not made. As the following actual case history will demonstrate, much was learned from the mistake, and, with some fortune, all turned out well. The facts are as follows:

Mr. G, the decedent, died in May 1993 leaving a surviving spouse, S, and three grandchildren, as well as great grandchildren. An only son, father of the three grandchildren, had predeceased G. Under the terms of G's will, assets were to be allocated first to a marital trust in an amount that would qualify for the marital exemption. The marital trust was in turn divided into marital trust A and marital trust B. Marital trust A was to consist of assets having a value of $1,000,000 or such lessor sum as represents the amount needed to consume any unused portion of the decedent's GST exemption. The balance was to be placed into marital trust B. The income from both marital trusts A and B was payable to S during her life. The remainder of marital trust A was payable to great grandchildren. The remainder of trust B was payable to one of the grandchildren (GC1).

In preparing the estate tax return, Form 706, Schedule M was properly completed, qualifying both marital trusts A and B for the marital exemption.

In order for G to be deemed the "transferor" for purposes of the GST exemption, Schedule R provides a box to be checked to trigger the reverse QTIP election. If such box is not checked, the availability of the decedent's $1,000,000 GST exemption is lost.

In inputting the return into the computer, a mistake was made on Schedule R and the box was not checked. The $1,000,000 GST exemption, however, was correctly allocated to marital trust A. The return was filed showing no tax due, but with the error uncorrected. A closing letter was subsequently issued by the IRS.

The error was later detected, but within the statutory period for filing the estate tax return. Needless to say, the accounting firm that had prepared the return began reviewing their malpractice policy to see if there was sufficient coverage to protect against the potential GST tax ramifications that might occur.

Under somewhat similar circumstances the IRS had issued a private letter ruling 9641013 granting the petitioner the relief requested, namely to permit a reverse QTIP election. Section 301.9100-1(a) of the Procedure and Administrations Regulation permits the IRS Commissioner to grant an extension of time to make a reverse QTIP election, provided that the statute of limitations has not expired and the request is made within a reasonable time under the

Based on this private letter ruling, a request for a similar ruling was prepared by the accounting firm. Before it was ready for submission to the IRS, S, the widow of G died. Under the terms of her will, she left her entire estate outright to two grandchildren (GC2 and GC3) who had been completely left out of G's will. As a result of such bequests, the $1,000,000 GST exemption available to S was not needed, as the bequests to GC2 and GC3 fall within the "predeceased child rule" whereby direct skips to children of a predeceased child are not subject to the generation skipping tax [IRC section 2612 (C)]. Accordingly, the unused $1,000,000 GST exemption available to S could now be allocated to marital trust A created under the will of her spouse, G. Needless to say, the request for the letter ruling was tabled and the accountant who prepared the return is now sleeping much better.

The following can be learned from the above:

1. Under the facts of this case, in making the reverse QTIP election such election should only be made as to marital trust A. By restricting the reverse QTIP election to marital trust A, S is deemed to be the "transferor" with respect to the bequest of marital trust B. Had G made the reverse QTIP election with respect to marital trust B, even though G could be deemed the transferor, the predeceased child rule would not apply, thereby subjecting marital trust B to a GST tax. The reason the predeceased child rule does not apply under the circumstances in G's estate, is because the transfer to GCI under marital trust B is not a direct skip since S has an intervening income interest in marital trust B.

2. As a result of the failure to check the box on the top of Schedule R, S is deemed to be the transferor of the remainder interest passing to GCI under the terms of marital trust B. Since such transfer occurs after the death of S, when there is no longer an intervening income interest to S, the transfer is a direct skip and the predeceased child rule does apply. Accordingly, there is no GST tax on the transfer by S to her grandchild GCI with respect to marital trust B.

New Development

The IRS recently announced that it has revised the Form 706 (U.S. Estate Tax and Generation-Skipping Transfer Tax Return). The Revised Form 706 (revised April 1997) is substantially the same as the 1993 version, except that Schedule R (Generation-Skipping Transfer Tax) no longer requires the estate's fiduciary to check a box to make a reverse QTIP election. Instead, a reverse QTIP election will be considered to have been made by listing the qualifying property on Line 9 of Part 1 of Schedule R.

Estate tax return preparers can now breathe a little easier in light of the above announcement. *

Laurence I. Foster, CPA
KPMG Peat Marwick LLP

Eric M. Kramer, JD, CPA
Farrell, Fritz, Caemmerer, Cleary, Barnosky & Armentano, P.C.

Contributing Editors:

Richard H. Sonet, JD, CPA
Marks Shron & Company LLP

Lawrence M. Lipoff, CEBS, CPA
Lipoff and Company, CPA, PC

Frank G. Colella, LLM, CPA
Own Account

Jerome Landau, JD, CPA

Nathan H. Szerlip, CPA
Edward Isaacs &
Company CPAs LLP

Lenore J. Jones, CPA
Jacobs Evall & Blumenfeld LLP

James B. McEvoy, CPA
The Chase Manhattan Bank

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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