After losses in three circuits, the IRS, in TD 8779, issued final regulations which permit “contingent” QTIP elections, which allow greater post-mortem estate planning. The regs provide that property is eligible for the QTIP election if the spouse’s income interest is contingent on the QTIP election, but if no election is made the property will pass to beneficiaries other than that spouse. In planning for the election, it may be prudent to provide for the funding of several QTIP trusts, to avoid making the election an all-or-nothing proposition.
In Ltr. Rul. 9751003, the IRS held that gifts of limited partnership interests are future interests that do not qualify for the annual exclusion where the partnership agreement provides that the general partner may, in its complete discretion, make or withhold distributions. (To circumvent this result, the agreement might provide limited partners with a 30-day Crummey power to withdraw their shares of the partnership capital accounts immediately following a gift of a partnership interest.) In a related matter, the IRS reaffirmed the validity of Crummey powers for remote contingent beneficiaries in Ltr. Rul. 9751003.
In Rev. Rul. 98-21, the Service held that gift tax will be imposed with respect to the transfer of employer stock options from parent to child when the child eventually exercises the options, not on the earlier transfer date, prior to appreciation.
In Ltr. Rul. 9815023 the IRS ruled that the commutation of an irrevocable trust in which the grantor had retained a lifetime income interest (with the consent of all beneficiaries pursuant to NY EPTL § 7-1.9) resulted in no taxable gift to the beneficiaries, since a completed gift of the remainder interest had already been made at trust inception. The commutation would also avoid the inclusion of the entire trust fund in the grantor’s estate because of the retained interest under Code Sec. 2036.
Under new Regs. § 25.2518-2(c), an interest in jointly held property must be disclaimed within 9 months of the date of death of the first joint tenant, regardless of whether that interest was unilaterally severable. Since the new rule applies irrespective of the contribution of either joint tenant, the surviving joint tenant could disclaim one-half of an interest for which he paid the entire consideration.
Final regulations provide that a qualified personal residence trust (QPRT) must prohibit the repurchase of a residence from the trust. However, the new rule would not prohibit either (i) the retention of a contingent reversionary interest, (ii) a testamentary power of appointment, or (iii) a spousal interest that would arise in the event of the death of the grantor before the expiration of the reserved term. The tax result is unclear if the trustee, despite the prohibition, sold the residence back to the grantor.
The minimum distribution requirements of Code Sec. 401(a)(9) provide that retirement death benefits not paid to a surviving spouse must be distributed within 5 years unless paid to a “designated beneficiary,” in which case payments may continue over that person’s lifetime. Proposed regs detail the manner in which a trust, which cannot be a designated beneficiary, may still be a beneficiary, with trust beneficiaries named designated beneficiaries. The regs now also permit plan benefits to be paid to a revocable trust, provided the trust becomes irrevocable at the participant’s death.
In Ltr. Rul. 9829025, husband and wife transferred two parcels of real property to a grantor trust, entered into a like-kind exchange agreement with a bank, and then sold the properties. The husband died after identification, but before purchase, of the replacement property. Since the exchange would have been a valid three-cornered like-kind exchange, the sales proceeds held by the trust did not constitute IRD, and the surviving spouse was entitled to a stepped-up basis pursuant to Code Sec. 1014(b)(6).
Reg 301.7701-3 now permits non-corporate entities to elect classification for tax purposes. Absent an election, most non-corporate entities, except single-owner entities, are taxed as partnerships. A non-corporate entity may also elect to be taxed as an association. Such an election, though unusual, might be advantageous if current losses of the partnership or LLC could not be used by partners or members.