A Better Estate Planning Option Is Available Under A New IRS Rule

The 2010 Tax Act introduced us to “portability” of the estate tax exemption, allowing a surviving spouse to add a deceased spouse’s unused exemption amount to his/her own estate tax exemption. This added exemption can be used during the survivor’s lifetime, or at death. To activate portability, the deceased’s estate must file an estate tax return electing the transfer of any unused exemption amount.

Although portability seemed to create a simple solution to estate tax planning for married couples, an earlier revenue procedure rule (Rev. Proc. 2001-38) stood in the way of its easy application and use. Specifically, inconsistencies in the rules meant uncertainty regarding the effectiveness of electing portability when a married couple had established a Qualified Terminable Interest Property Trust, aka “QTIP” trust.

QTIP trusts provide married couples flexibility in an estate plan, allowing the executor to choose the estate tax treatment of the QTIP trust depending on changes in tax laws or asset values. A QTIP trust also allows a couple to take advantage of the marital deduction for transfers made to a spouse in trust while allowing limitations on the power or ownership rights that spouse will have over the trust assets. This is particularly useful in second marriages since many families want to ensure that trust assets will ultimately pass only to certain children or family members. While complex, the QTIP trust is an important component of estate planning where flexibility regarding the timing of estate tax payments and the assurance of assets passing a particular way are primary objectives.

The older revenue rule allowed the IRS to grant relief for a mistaken QTIP election by an estate that did not need the election to reduce estate tax liability. Since 2010, the executor of a nontaxable estate could not file an estate tax return that made both a QTIP and a portability election. In such cases, the IRS would not recognize the QTIP election. Estate planners who recognized the advantages of using both the QTIP and the portability election have been awaiting correction of this inconsistency and the wait is now over. A newly enacted rule, Revenue Procedure 2016-49, clarifies that dual election is available in designing estate plans without compromising a couple’s tax objectives.

Why would this matter to you? A QTIP trust can reduce estate taxes at death, allows for a double step-up in basis when assets pass to the children, and has non-tax benefits regarding the control of assets. A portability election means the surviving spouse can increase his/her estate tax exemption amount to offset gift or estate tax liability. By using both elections, an executor can most effectively balance estate planning objectives regarding minimizing taxes and creating certainty about how assets will pass by using both a QTIP trust and choosing portability.

If you would like to discuss your estate planning options, please contact Kling Law Offices for a free consultation. Our goal is to help you understand and plan your estate to achieve the peace of mind you deserve.