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Situation: I have a decedent who passed away in 2006. He had a survivor's trust, with his separate property at his date of death. His first spouse passed away in 1990. He subsequently remarried. Because he remarried, he amended his survivor's trust to have a QTIP trust that is funded with his personal residence and an amount exceeding the estate exclusion amount (2 million). His second wife unfortunately died 6 weeks after he did. The lawyer wants to still fund the trust so that his estate will have no tax and so that we can use up most to all of her 2 million exclusion with the QTIP trust.
It is my understanding that technically when you make the QTIP election, you must make it with net assets and not gross assets. In other words if you had debts and other expenses to pay out of the estate, you don't make the QTIP election with gross assets, but with what the net assets would be after payment of debts and expenses. Of course when you do this, you will lose all benefit of these expenses, because you will have no estate taxes and you aren't able to divert them to the 1041.
I've gone forward on ABC trusts in the past and have not taken the expenses on the 706, but took them on the 1041. I know this is supposed to be technically wrong, but I've never caught an audit for doing it.
Does anybody have any comments about doing this? Would you take a chance and not list the expenses on the 706 and take them on the resulting 1041? Of course funeral and medical debts are allowed only on the 706 and not the 1041.
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Which trust is the residue? QTIP trust or bypass trust?
John Jacobson
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| John will give you a more learned response but my immediate reaction was that when the survivor dies within 15 months you don't make the QTIP election. I believe that you still may need to fund and in certain circumstances there is a credit available on the second 706 even when you don't pay tax. This was something that Joe Stemach used to lecture about. I'm not sure if that technique fits your facts - but it gives you more to consier.
Mary Kay Foss
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You misread my post. The decedent was the second to die. There had been a credit trust and a survivor's trust formed upon the death of his first wife. Of course the credit trust from the first marriage is not includible in his estate.
He amended his survivor's trust whereby all of the exemption amount is to be distributed outright to his children, and a QTIP trust is to be funded for the remaining assets above the exexemption amount (ie exceeding 2 million). The QTIP trust is to be funded with the residence and any other assets. It is my belief that in order to take the QTIP election, I have to include all expenses and debts of the decedent, even though I wont have any estate taxes.
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I can't tell from your latest answer which trust (QTIP or bypass) is the residue. This will tell me which trust will actually pay the administration expenses.
John Jacobson
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| There is no bypass trust. The decedent's children are to be distributed the amount equal to the exemption equivalent (2 million). A QTIP trust is to be funded for the residue.
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| With the QTIP trust as the residue, the assets passing to the QTIP trust and used to pay administration expenses, etc. won't qualify for the marital deduction. If you take them on the 1041, there will be some estate tax. The marginal estate tax rate is usually higher than the combined income tax rate, so the QTIP trust will usually be better off if the expenses are taken for estate tax purposes. I would go through the motions of funding the QTIP trust, both to establish the marital deduction, and to establish the new basis of the assets on the subsequent death of the surviving spouse. Look at Estate of Hester (2007-1 USTC 60537) for an example on different facts of what could happen if the formalities of what otherwise seems to be a waste of time are not followed.
John Jacobson
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John's reply got me to do a bit more searching, to try to understand this.
I found this article in The CPA Journal
http://www.nysscpa.org/cpajournal/old/15203134.htm
bill
ps to Anonymous: sign up and log in, so we'll know who you are.
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| Thanks for the replies. Both of you have confirmed what I thought I had to do. I bookmarked that article and also printed a hard copy out.
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Good article, Bill. In the situations I've seen, the trustee charged administration expenses potentially deductible on the 706 to principal for accounting purposes, either at the terminating trust level, or after the QTIP trust was funded. I assumed that that is what the poster had in mind, but perhaps I shouldn't have. I've wondered, but haven't researched, whether attempting to charge these types of expenses (as opposed to ongoing administration expenses) against income (see Probate Code Section 16340(c)) would somehow poison the QTIP election, specifically its provision that all income from the QTIP trust must go the the surviving spouse. Has anyone looked at this issue closely?
John Jacobson
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