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Strategy for Utilizing Both the GST Exemption and Estate Tax Exemption Portability

Weber Law March 5, 2015

Federal law changed in 2012 when Congress made permanent the valuable estate planning tool that permits a surviving spouse to use a decedent spouse’s unused exclusion (DSUE).  While this rule provides added flexibility in estate planning, the change also created an added level of complexity.  An example of this complexity involves the generation skipping transfer tax (GST) exemption which cannot be allocated to a surviving spouse like an unused estate tax exemption.  The difference in applicability involving these rules can cause estate planning challenges for those facing potential GST tax liability.  However, experienced Kansas estate planning attorney J. Joseph Weber sometimes uses a QTIP to navigate around this potential problem.

One approach to this problem involves a partial QTIP election.  When the executor for the first-to-die spouse elects to qualify only a part of the marital gift as QTIP property, the balance of the assets pass directly to the trust beneficiaries.  This strategy causes the GST exemption of the first-to-die spouse to be used to the degree that the GST exemption is used.  It is important to realize that this also will result in the estate tax credit of the first-to-die spouse being triggered when the first-to-die spouse passes away to the extent the QTIP election is utilized.  This means a partial loss of the benefits of portability of the first-to-die spouse’s estate tax credit as well as the potential benefit of establishing a new basis for the assets when the surviving spouse passes.  The merits of such an approach depend on a number of factors that include the amount of appreciation/depreciation of the trust property at the time of death of the surviving spouse, the nature of the assets and the value of the estate.

Depending on the situation, a “reverse QTIP” election might prove a better alternative.  This approach can provide the advantage of a new basis while still permitting the use of the GST exemption of the first-to-die spouse.  Pursuant to 26 CFR 26.2652(a), an individual opting for a reverse QTIP election “may, for purposes of chapter 13, elect to treat the property as if the QTIP election had not been made.”  In other words, all of the property will still be considered part of the estate of the surviving spouse though the first-to-die spouse will be deemed the transferor.

An example of this approach is based on a scenario detailed in 26 CFR 26.2652-2(d):

The first-to-die spouse transfers $1,500,000 to a trust which directs payment of all income from the trust to be paid to the surviving spouse during his or her lifetime.    When the surviving spouse passes, the principal placed in the trust is transferred to the couple’s grandchild.  The first-to-die spouse treats the entire transfer as a transfer of QTIP with a reverse election for all of the property.  Since the first-to-die spouse invokes the reverse QTIP election, the grandchild benefits from being designated as the transferor of the property after the death of the surviving spouse for purposes of chapter 13.  Thus, the death of the surviving spouse triggers a taxable termination rather than a direct skip.

The strategy of using a reverse QTIP election provides an efficient and effective approach to obtain a new basis on all the assets in the trust at the time of the death of the surviving spouse while preserving the GST exemption of the first-to-die spouse.

The interplay of multiple tax rules and exemptions with proper structuring of estate planning devices can have a dramatic impact on the value of the legacy left to surviving loved ones.  Estate planning advice can ensure that your spouse, children, grandchildren and other loved ones receive the maximum benefit from that legacy.

If you have questions about estate planning issues and/or asset protection, we welcome the opportunity to talk to you and answer your questions.  We invite you to call the Weber Law Office or to submit an inquiry form through this website to schedule your initial consultation with our experienced Wichita estate planning attorney.