Date: June 9, 1999

Primary Author: Scott Beane



If a reverse QTIP election was not made on form 706 to absorb the unused portion of the $1,000,000 Generation Skipping Tax exemption, can this problem be cured after the death of the second to die (death of surviving spouse)?


In general, yes, but it is a cumbersome process as follows:

1. The objective is to fracture out skip beneficiary shares from non-skip beneficiary shares, for which no GST exemption is necessary.

2. To that end, it is critical under IRC section 2654(b) to properly separate these trust components. There are two alternatives, as follows:

A. IRC section 2654(b)(2) provides under Reg. 26.2654-1(a) that "substantially separate and independent shares" shall have the meaning under Reg. 1.663(c)-3 relating to income tax separation. Thus, if the trust instrument provides for separately distinguishable shares, then those shares can be fractured off into separate trusts for GST purposes.

B. The Trust must be severed under local law in accordance with Reg. 26.2654-1(a)(3) and Reg. 26.2654-1(b), which will also requires that a probate petition be filed with form 706, and the petition must be filed the day before the due date of the form 706.

Analysis of two alternatives:

Reg. 26.2654-1(a)(1)(I) provides that a portion of a trust will not be treated as a separate share for GST purposes unless the share exists from, and at all times after the creation of the trust. However, the trust is treated as created on the date of death of the "grantor" if the trust is part in its entirety in the grantor's gross estate. The term "grantor" is not defined. It could refer to the original settler of the trust or income tax rule definition of "grantor" as the income beneficiary. The latter seems more likely. However, since the credit shelter portion is excluded from the decedent's gross estate, I do not believe the separate trust rule, #1 above, to be the most viable alternative. The problem to solve is the lack of separate trust division in the first to dies' trust document which is very necessary to make efficient use of the GST exemption election.

Follow up question - How should the trust be severed?

1. Credit shelter portion (retroactive to QTIP election)

2. Division of remainder, after estate tax and as of the second death, into the applicable separate shares. The apportionment of the decedent's estate tax out of the trust before funding is important to reduce use of GST election.



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