[WSBAPT] 2519 and termination of QTIP

[Sam Furgason]

Katherine,

 

If you have sufficient funds to merit a federal QTIP, his estate should have no DSUE because you will have used all of his exclusion amount. That should apply unless the first spouse was impecunious, in which case DSUE would apply (but your post refers to her “half”). ($30m/2 = $15m, which is >$5,340k.) The same logic would apply if the first decedent’s estate is $30m (your question does not make it clear in my mind whether the first spouse’s estate is $30m or the entire community estate is $30m, but implies the latter.) 

As for terminating the QTIP (which I believe gifting of any income interest would do, per 2519), see if the QTIP language permits liberal distributions to the surviving spouse. If so, you could make large distributions to the spouse and she could make gifts, without terminating the entire QTIP. Since we are near a year end, she could make multiple annual exclusion gifts and reduce her taxable estate somewhat. Those gifts would be tax free, and could be spread among children, grandchildren, and spouses. 

Also, if she gives away her own estate entirely, then withdrawals from the QTIP are more reasonable, if there is some sort of HEMS type restriction in place. 

Is a QTIP “termination” even necessary? 

Don’t forget, the executor makes the QTIP election; it’s not automatic. His executor can make a partial QTIP election rather than a full one, or no election at all, so that the portion of the decedent’s trust which is QTIP eligible can be defined as part of the overall plan. You can time this also, since the federal and state exclusion/exemption amounts rise on 1/1/2015. I don’t think the annual exclusion is changing for next year, but if you have 5 eligible gift recipients, that’s an extra $70k which will not be taxed at either the state or federal levels, thereby justifying  a part of your fees. 

 

S                                  

 

From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Katharine P. Bauer
Sent: Friday, November 21, 2014 8:22 AM
To: probate
Subject: [WSBAPT] 2519 and termination of QTIP

 

Query:

I have a large probate ($30 million) where the first spouse died and his Will funds a QTIP for his surviving spouse.  We are contemplating using portability to transfer his unused amount to his spouse. Surviving spouse is incompetent and unlikely to live a long time.  Her POA has extremely broad powers - of gifting, disclaiming and ability to transfer to other trusts and family. Her AIF is in the process of gifting away her half of the estate, utilizing her fed applicable exemption amounts (no Washington gift tax) and paying any gift tax incurred.  

 

First, We are curious as to when she may use her spouse's amount in gifting.  Is it after the IRS accepts his 706?  She likely won't live that long.

 

Second, we are curious about terminating the QTIP and either giving her the life income interest or all of the trust.  The thought is to again gift it to children if she takes it all.  Does 2019 cause any further damage by pulling it into her "estate" and incurring gift tax?  She will have used all of her fed exemption anyway and will definitely incur further incur gift tax.  The purpose here would be to avoid the Washington state estate tax on the extra $15 million  by disposing of it now.  

 

Finally, and third, by paying gift tax now, does 2035 pull it back into her estate if she dies prior to 3 years, which she will?  I am having trouble interpreting the statute when we are contemplating terminating the QTIP and gifting her the income interest or all of it....

 

We could simply disclaim QTIP assets under husband's estate but then it would incur the Washington tax.

 

I have reviewed 2511, 2519 and 2035.  Since this is a 3:00 a.m. thought, I would appreciate any and all comments as to whether this is a good idea.  After I have my coffee, I may regret my stupidity in sending this out!

 

 

-- 

Katharine P. Bauer

Bauer Pitman Lifetime Legal, PLLC
1235 Fourth Ave. East, Suite 200
Olympia, Washington 98501
tel. 360.754.1976
fax. 360.943.4427

e-mail:  <mailto:kpb at bpblegal.com> kpb at bpblegal.com

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