george2010
Junior Member
What is the name of your state (only U.S. law)? TX
I am trying to determine if there are any gift tax or GSTT consequences if a surviving spouse, who is the beneficiary of a QTIP trust, decides to leave income in the trust, rather than take a distribution.
Background: QTIP trusts require that the surviving spouse be entitled to all income from the trust. However, the actual wording of 20.2056(b)-7(d)(2) [which in turn references 20.2056(b)-5(f)(8)] stops short of requiring that the income be distributed... the spouse has the option to leave the income in the trust, where "the trust income is to be accumulated and added to corpus." (I first learned about this while reading an excerpt from Sebastian Grassi's "Drafting Marital Deduction Trusts, paragraph 6.1(d) http://files.ali-aba.org/thumbs/datastorage/skoob/articles/ch06 MDTrusts_2006Supp-7_thumb.pdf)
The estate planning lawyer that I am currently working with has produced draft documents that mandate annual distribution of all income from the QTIP. I suggested that instead we use wording that gives the spouse the option of leaving the income in the trust. My lawyer is extremely resistant to that idea, based on an assertion that the spouse's choice to leave income in the trust would be viewed to be a lapse of a power of appointment, which would be viewed as a transfer of property by the spouse to the trust, which my lawyer states "would have potential gift and generation-skipping tax implications."
I've been studying the relevant gift and GST codes (IRC Chapters 12 and 13), and I'm having difficulty understanding my lawyer's concern.
First off, what I am proposing merely adds post-mortem flexibility; it does not force the spouse to leave the money in the trust. So presumably, even if my lawyer is right about potential gift or GST consequences, my spouse could use professional tax advisers to decide upon the optimal course of action when the time comes.
Secondly, I understand that the 5% or $5000 limits come into play when determining the size of the gift, so even if the spouse's decision not to take a distribution was viewed as a transfer of property back to the trust, the deemed size of the transfer would be reduced. eg. say the trust is worth $1,000,000 and generates $100,000 in income. If Spouse leaves the $100,000 in the trust, only $100,000 - 5%(1,000,000) = $50,000 would be viewed as a transfer. Or said another way, the first $50,000 of income that the spouse chooses to leave in the trust would be ignored.
Thirdly, I'm failing to understand why such a transfer would even be viewed as a gift in a normal QTIP trust, which eventually will end up in surviving spouse's estate anyway. If the only current beneficiary of the QTIP is the spouse, then who is the gift to? It seems to me that the transfer of property is just from one part of spouse's estate to another. Where is the gift?
Things get a bit murky if the trust has had a "reverse QTIP" election for GST purposes, because in that case the deceased spouse continues to be considered the transferor for GST purposes. But even in that case, if a failure to take an income distribution were viewed as a transfer by surviving spouse into the trust, then couldn't the surviving spouse allocate GST exemption to that transfer, to maintain the 1.0 inclusion ratio of the trust?
Anyway... long winded post, but I'm hoping for someone to either support my belief that my lawyer is leading me astray, or alternatively smack me upside the head if he's correct and I should be following his advice to prevent income accumulation in the QTIP trust.
Thanks in advance.
I am trying to determine if there are any gift tax or GSTT consequences if a surviving spouse, who is the beneficiary of a QTIP trust, decides to leave income in the trust, rather than take a distribution.
Background: QTIP trusts require that the surviving spouse be entitled to all income from the trust. However, the actual wording of 20.2056(b)-7(d)(2) [which in turn references 20.2056(b)-5(f)(8)] stops short of requiring that the income be distributed... the spouse has the option to leave the income in the trust, where "the trust income is to be accumulated and added to corpus." (I first learned about this while reading an excerpt from Sebastian Grassi's "Drafting Marital Deduction Trusts, paragraph 6.1(d) http://files.ali-aba.org/thumbs/datastorage/skoob/articles/ch06 MDTrusts_2006Supp-7_thumb.pdf)
The estate planning lawyer that I am currently working with has produced draft documents that mandate annual distribution of all income from the QTIP. I suggested that instead we use wording that gives the spouse the option of leaving the income in the trust. My lawyer is extremely resistant to that idea, based on an assertion that the spouse's choice to leave income in the trust would be viewed to be a lapse of a power of appointment, which would be viewed as a transfer of property by the spouse to the trust, which my lawyer states "would have potential gift and generation-skipping tax implications."
I've been studying the relevant gift and GST codes (IRC Chapters 12 and 13), and I'm having difficulty understanding my lawyer's concern.
First off, what I am proposing merely adds post-mortem flexibility; it does not force the spouse to leave the money in the trust. So presumably, even if my lawyer is right about potential gift or GST consequences, my spouse could use professional tax advisers to decide upon the optimal course of action when the time comes.
Secondly, I understand that the 5% or $5000 limits come into play when determining the size of the gift, so even if the spouse's decision not to take a distribution was viewed as a transfer of property back to the trust, the deemed size of the transfer would be reduced. eg. say the trust is worth $1,000,000 and generates $100,000 in income. If Spouse leaves the $100,000 in the trust, only $100,000 - 5%(1,000,000) = $50,000 would be viewed as a transfer. Or said another way, the first $50,000 of income that the spouse chooses to leave in the trust would be ignored.
Thirdly, I'm failing to understand why such a transfer would even be viewed as a gift in a normal QTIP trust, which eventually will end up in surviving spouse's estate anyway. If the only current beneficiary of the QTIP is the spouse, then who is the gift to? It seems to me that the transfer of property is just from one part of spouse's estate to another. Where is the gift?
Things get a bit murky if the trust has had a "reverse QTIP" election for GST purposes, because in that case the deceased spouse continues to be considered the transferor for GST purposes. But even in that case, if a failure to take an income distribution were viewed as a transfer by surviving spouse into the trust, then couldn't the surviving spouse allocate GST exemption to that transfer, to maintain the 1.0 inclusion ratio of the trust?
Anyway... long winded post, but I'm hoping for someone to either support my belief that my lawyer is leading me astray, or alternatively smack me upside the head if he's correct and I should be following his advice to prevent income accumulation in the QTIP trust.
Thanks in advance.
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