Recent Decisions

Charitable Deduction for Gift of QTIP:

private IRS Letter Ruling has concluded that a surviving spouse's renunciation of her income interest in a qualified terminable interest property (QTIP) trust qualified for a gift-tax charitable deduction. Husband's residuary estate funded a marital trust for Wife's lifetime benefit, after which the assets fund a charitable remainder unitrust (CRUT). Daughter was provided a 5% interest in the CRUT during her lifetime. Prior to Wife's death, she and the other interested parties agreed to sever the QTIP. Wife then renounced her income interest in one of the severed trusts so that it could immediately fund the CRUT.

The IRS determined that the estate's QTIP election remained valid notwithstanding the severance of the QTIP because the resulting portions of the QTIP continued to qualify as QTIP trusts. In addition, the portion of the QTIP that was not renounced did not trigger a gift. Nor was the unrenounced interest treated as a retained interest for purposes of section 2702. Note that gifts were triggered by Wife's renunciation of the other portion of the severed QTIP. The renunciation triggered a net gift of her qualifying income interest as well as the remainder interest. However, amounts passing to the CRUT as a result of the renunciation qualified for a gift-tax charitable deduction. Letter Ruling 200324023.

Extension for GST Exemption Allocation

Grantors who made lifetime transfers to an irrevocable trust over 12 years were permitted a 60-day extension to allocate their generation-skipping transfer (GST) tax exemption to the transfers. Grantors were not advised by their accountant to file gift-tax returns allocating their GST exemption. The IRS concluded that the requirements of Reg. §301.9100-3 were satisfied because (1) the couple reasonably relied on a qualified tax professional who failed to advise the couple to make the allocations, and (2) granting the extensions did not prejudice the interests of the government. Letter Ruling 200324041.

Extension for Alternate Valuation Election

An executor hired an accountant who requested an extension of time to file the estate tax return but neglected to file an election for the alternate valuation date. Under IRC §2032, an executor may elect to value the estate's assets as of the date six months after the decedent's death (if such assets have not been sold or exchanged during that six months). The accountant filed an estate tax return (without making the election) and the IRS responded by issuing a closing letter. When the accountant's oversight was discovered, the accountant filed a supplemental estate tax return in which the alternate valuation election was made and requested an extension of time (after the fact) to make the election. Note that the supplemental return was filed less than one year after the required time (with extensions). The IRS ruled privately that the extension of time was warranted under Regs. 301.9100-1 and -3 because the executor acted reasonably and in good faith. In addition, granting the relief did not prejudice the government's interests. Letter Ruling 200324048.

QFOBI Election and Stock Redemption

Decedent's estate was comprised of shares of a corporation worth $3 million. Following a stock redemption of one-third of Decedent's shares, the remaining $2 million of stock constituted less than 50% of Decedent's $5-million adjusted gross estate. Could the estate still make a qualified family-owned business interest (QFOBI) election?

Yes. Decedent's executor elected to treat Decedent's stock as QFOBI under IRC §2057. Stock was then redeemed from the estate to pay the resulting estate taxes. The IRS treated this scenario as being analogous to the application of rules for IRC §6166. Therefore, the stock redemption and distribution of assets did not affect the initial determination of the estate's eligibility to make the QFOBI election. Rev. Rul. 2003-61.

Estate Includes Encumbered Property

Decedent was a nonresident alien who owned real property in California. The property was worth $885,000 but Decedent borrowed $700,000 against the value of the home using a promissory note that was secured by a deed of trust. At the time of his death, $650,000 was the remaining balance on the note. Decedent's estate sought to value the property at its net equity value of $235,000. The IRS argued that the full fair market value of the property be included in Decedent's estate. The Tax Court held that the full value was includible in the gross estate because the Decedent was personally liable for the debt under state law as well as the terms of the promissory note. This result is directed by Reg. 20.2053-7. The Ninth Circuit Court of Appeals affirmed the Tax Court. Fung Estate, Court of Appeals, 9th Cir. (2003).

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Craig L. Israelsen is an Associate Professor in the Department of Consumer and Family Economics at the University of Missouri-Columbia (http://www.missouri.edu/index.cfm) where he teaches courses in Personal Finance and Family Living. He holds a Ph.D. in Family Resource Management from Brigham Young University. He received a B.S. in Agribusiness and a M.S. in Agricultural Economics from Utah State University. Primary among his research interests is the analysis of mutual funds. He writes monthly for Financial Planning magazine.