On Aug 9, 2013, Treasury released its 2013-2014 Priority Guidance Plan, which lists 234 issues that are a priority for Treasury to review or resolve in the upcoming year (July 2013 to July 2014). Eleven items are listed that relate to gifts, estates and trusts, two of which are recent additions.
The first recent addition relates to the validity of "QTIP" elections on returns that are filed for the sole reason of taking advantage of the portability election. QTIP elections are made on a decedent's estate tax return to qualify for the marital deduction any property bequeathed to a marital trust for the benefit of the surviving spouse. A portability election is made to carry over for use by the surviving spouse whatever portion of the decedent's estate tax exemption amount that the decedent did not use. This election is also made on an estate tax return.
If an estate is less than the estate tax exemption amount (currently, $5,250,000), it does not have to file an estate tax return. However, to elect portability, the estate would have to file an estate tax return. A QTIP election may be made on this estate tax return for various reasons, none of which is to reduce the estate tax liability to zero (because it already is zero). In Rev. Proc. 2001-38, the Service stated that it "will disregard a QTIP election and treat it as null and void if the election was not necessary to reduce the estate tax liability to zero. . . ." Does this mean the Service will disregard QTIP elections made by small estates that are already below the threshold amount? We think the Service will resolve this issue in favor of the taxpayers, because the authority to make a QTIP election is granted by statute, which overrides the holding of Rev. Proc. 2001-38.
The second addition relates to the allocation of a taxpayer's generation-skipping transfer ("GST") tax exemption to property subject to an "estate tax inclusion period" (also known as an "ETIP"). A taxpayer may not allocate generation-skipping transfer tax exemption to property during an ETIP, which is the period of time during which the property would be included in the taxpayer's estate if the taxpayer died. An example of an ETIP is the annuity period of a grantor retained annuity trust (a "GRAT"). A taxpayer may want a portion of the trust fund existing at the termination of the GRAT to be exempt from GST tax. It is currently unclear how one can allocate GST to a portion of the remaining balance of a GRAT. The Service plans on looking more closely at this issue in the coming year.
This article first appeared in lexology.com.