Assigning QTIP Income Interest: A Valuable GST Planning Tool

International Wealth & Asset Planning Blog Sep 17, 2018 Denver, CO

With the current estate tax exemption of $11.18MM ($22.36MM for married couples), there is an increased emphasis on portability planning, especially for married couples with combined estates above $11.18MM but below the combined exemption amount. A portability plan often involves leaving everything upon the first spouse’s death to a QTIP trust created for the benefit of the surviving spouse. Upon the second spouse’s death, the second spouse’s estate can benefit from the first spouse’s unused estate tax exemption to increase the amount the second spouse can pass tax free upon his or her death.

Although this structure can eliminate or reduce estate taxes for married couples, the generation skipping transfer tax (“GST tax”) exemption cannot be “ported” over to the surviving spouse. A reverse QTIP election can be made to allow the QTIP trust to take advantage of the deceased spouse’s GST tax exemption, but generally there is not much flexibility for the surviving spouse to engage in GST tax planning after the first spouse has passed away and benefit from the deceased spouse’s unused GST tax exemption. Rather, the deceased spouse’s GST tax exemption simply applies to property held under the QTIP trust, property which may or may not eventually be transferred to a “skip person” (i.e., a person who is two or more generations below that of the person making the gift).

However, if the QTIP trust is properly structured ahead of time, the surviving spouse can gift his or her income interest in the QTIP trust to trusts specifically created for future generations. When the gift of the income interest is made, the surviving spouse is treated, under IRC § 2519, as making a gift of the entire principal amount then remaining in the QTIP trust. As a result, if the couple’s estate plan was properly structured ahead of time to allow such a gift to occur, the surviving spouse is able to essentially port the deceased spouse’s GST tax exemption to gifts he or she made to the new trusts.

This particular structure is not right for all families and can inadvertently trigger potentially severe gift and estate tax consequences if not structured properly. Due to these potential adverse consequences, many estate planners try to avoid implicating IRC § 2519 entirely. However, when structured and utilized properly, couples can take advantage of IRC § 2519 to provide the surviving spouse with flexibility to engage in GST tax planning after the death of the first spouse. This flexibility can be extremely important for couples whose combined taxable estates would fall in the range between $11.18MM and $22.36MM.

Please contact us if you are interested in learning more about this particular structure and whether it is right for you and your family.

*The information in this article is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from Greenspoon Marder LLP or the individual author(s), nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

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