[WSBAPT] 2519 and termination of QTIP

Fri Nov 21 14:29:12 PST 2014

If I were in your shoes, I’d consider bringing in consulting counsel, either a tax attorney or respected estate planning attorney, from one of the larger firms. The cost is justified, and two minds could generate different solutions. I think there is more than one way to approach the goal. 

I’m still not clear on what you mean by “terminating” the QTIP. Has an election already been made? If so, it may be too late to change that because an election, once made, cannot be revoked (if I remember correctly). However, if you are still within  the period for filing a return you might be able to file a “revised” return to reduce or eliminate the election. Again, something to discuss with one of the people who regularly handle large estates. 

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 11:42 AM
To: WSBA Probate & Trust Listserv
Subject: Re: [WSBAPT] 2519 and termination of QTIP

Thanks, Sam.  That is about what I was thinking.  Joint estate of $30m sorry I wasn't clear.  We were wondering about terminating the QTIP and passing the income interest to her and balance to kids, not through disclaimer (would incur fed and state estate taxes) but by TEDRA.  Interesting situation where the family wants to avoid Washington State tax to the greatest extent, since there is no gift tax here (yet). She is definitely disposing of her half of the estate (yes $15 million).  If she has both their exemptions and uses them individually, he is not incurring Washington estate tax by transferring to her and she is taxed upon the gift at termination for federal purposes.  Just trying to figure out how to get it all to her and she makes all the taxable gifts during her lifetime.....Now, the coffee has worn off and I need more! :)  

Have a good weekend.

On Fri, Nov 21, 2014 at 11:10 AM, Sam Furgason <sam at furgasons.com <mailto:sam at furgasons.com> > wrote:

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>  [mailto: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 <tel:360.754.1976> 
fax. 360.943.4427 <tel:360.943.4427> 

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

This message is confidential and may be protected by the attorney-client privilege; it is intended solely for the use of the individual named above. If you are not the intended recipient, you are hereby advised that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this e-mail in error, please immediately notify the sender by telephone or e-mail, delete this message from your files, and return any printed copies to the sender by U.S. mail. Circular 230 Disclosure: Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, arrangement, or other matter

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-- 

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

This message is confidential and may be protected by the attorney-client privilege; it is intended solely for the use of the individual named above. If you are not the intended recipient, you are hereby advised that any dissemination, distribution, or copying of this communication is strictly prohibited. If you have received this e-mail in error, please immediately notify the sender by telephone or e-mail, delete this message from your files, and return any printed copies to the sender by U.S. mail. Circular 230 Disclosure: Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction, arrangement, or other matter

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