IRS Rules No Date-of-Death Basis on Death of Surviving Spouse

In “How to Get Date of Death Basis on Surviving Spouse’s Death,” I discussed the provisions of the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, dealing with the potential disallowance of a date-of-death basis on the death of a surviving spouse, if, at the death of the first spouse to die, a portability, and qualified terminable interest property (QTIP) election were made under applicable Treasury Regulations.¹

I took the position that the combined portability and QTIP election at the death of the first spouse to die wouldn’t result in a date-of-death basis at the death of the surviving spouse. A recent private letter ruling concurs with that position.

QTIP Election Null and Void

On Jan. 11, 2016, the Internal Revenue Service issued PLR 201615004,² citing Revenue Procedure 2001-38 (2001-38), which deals with a QTIP election that wasn’t necessary to reduce otherwise payable estate taxes. The PLR held that the QTIP election was “null and void”:

The executor of Decedent’s estate timely filed a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return. The executor listed Trust C and Trust C-1 on Schedule M of Form 706, and, by doing so, was deemed to have made the QTIP election with respect to those trusts . . .

In general, under Rev. Proc. 2001-38, a QTIP election under Sec. 2056(b)(7) will be treated as null and void for purposes of Secs. 2044(a), 2056(b)(7), 2519(a), and 2652, where the election was not necessary to reduce the estate tax liability to zero, based on values as finally determined for federal estate tax purposes . . .

In this case, based on the facts submitted and representations made, the QTIP election with respect to Trust C was not necessary to reduce the estate tax liability to zero. That is, the estate tax liability would have been zero whether or not the election was made with respect to Trust C. Accordingly, we rule that the QTIP election with respect to Trust C is null and void for purposes of Secs. 2044, 2056(b)(7), 2519 and 2652. The property held in Trust C will not be includible in the gross estate of Spouse under Sec. 2044, and Spouse will not be treated as making a gift under Sec. 2519 if Spouse disposes of the income interest with respect to that property. (Emphasis added)

Rev. Proc. 2001-38

In my prior article, I relied on Rev. Proc. 2001-38 and PLR issued in 2013 that cited it. Those authorities found an unnecessary QTIP election was null and void in a situation in which an estate made a QTIP election for a trust for the benefit of the surviving spouse. However, no actual QTIP election was needed for a marital deduction to reduce estate taxes because the decedent’s estate wasn’t subject to estate taxes due to its taxable amount for the year at issue. 

The introductory statement in Rev. Proc. 2001-38 stated:

Relief for surviving spouses in situations where a predeceased spouses estate made an unnecessary qualified terminable interest property (QTIP) election. (Emphasis added)

The situation in Rev. Proc. 2001-38 dealt with a request by the electing estate to avoid inclusion in the estate of the surviving spouse under Internal Revenue Code Section 2044, which includes in the surviving spouse’s estate property for which a marital deduction was allowed.

The use of “relief for surviving spouses” caused some to opine that the IRS didn’t intend to deny a date-of-death basis at the death of the surviving spouse when a combined portability and QTIP election had been made.³

I took a contrary view and argued that Rev. Proc. 2001-38 had a broader meaning, as it stated:

In summary, the use of an unnecessary QTIP election on the death of the first spouse to die does not allow a date of death basis at the survivor’s death. (Emphasis added)

Interestingly, PLR 201603004⁴ reinforces the mandate of the original language in Rev. Proc. 2001-38, by stating:

In the case of a QTIP election within the scope of this revenue procedure, the Service will disregard the election and treat it as null and void for purposes of Secs. 2044(a), 2056(b)(7), 2519(a), and 2652. The property for which the election is disregarded under this procedure will not be includible in the gross estate of the surviving spouse under Sec. 2044 . . . (Emphasis added)

The PLR continues:

In general, under Rev. Proc. 2001-38, a QTIP election under Sec. 2056(b)(7) will be treated as null and void for purposes of Secs. 2044(a), 2056(b)(7), 2519(a), and 2652, where the election was not necessary to reduce the estate tax liability to zero, based on values as finally determined for federal estate tax purposes . . .  (Emphasis added)

The introductory language of the PLR omits the word “relief,” which was included in Rev. Proc. 2001-38, which some appear to have relied on.⁵

Technical Argument

The following is a technical argument I prepared when the discussion of portability and QTIP elections was at its height.

Some have contended that the portability election, allowing an unused applicable exclusion amount by the first deceased spouse to die to pass to the surviving spouse, coupled with a QTIP election, allows a date-of-death basis at the death of the surviving spouse.

I’ve found no authority for this contention. There’s only been a “makes no sense” argument, as stated by the ACTEC Capital Letter No. 34:

            Item 5: The Validity of QTIP Elections in Portability-Only Returns

But, in approaches to portability widely discussed among commentators, a QTIP election might still be made to support a reverse-QTIP election for GST tax purposes, to gain a second basis step-up at the death of the surviving spouse, or for some other reason . . .

This view is reinforced by the explicit reference in Reg. §20.2010-2T(a)(7)(ii)(A)(4) to QTIP elections in returns filed to elect portability but not otherwise required for estate tax purposes, a reference that would make no sense if any such QTIP election were necessarily “null and void.” (Emphasis added)

The “makes no sense” argument is the only reasoning, other than mentioned in endnote 3, that’s been given for the contention. The major threat to this “makes no sense” argument is Rev. Proc. 2001-38, which provides:

SECTION 1. PURPOSE

This revenue procedure provides relief for surviving spouses and their estates in situations where a predeceased spouse’s estate made an unnecessary qualified terminable interest property (QTIP) election under § 2056(b)(7) of the Internal Revenue Code that did not reduce the estate tax liability of the estate. This revenue procedure describes the circumstances in which these QTIP elections will be treated as a nullity for federal estate, gift, and generation-skipping transfer tax purposes, so that the property will not be subject to transfer tax with respect to the surviving spouse. (Emphasis added)

Commentators have opined that Rev. Proc. 2001-38 isn’t applicable to a portability election, coupled with QTIP election. However, the commentators never address a PLR issued in 2013,⁶ which clearly applied  the treatment of denying a date-of-death basis of the Rev. Proc. to estates experiencing a QTIP election that wasn’t necessary to reduce estate taxes:

“the qualified terminable interest property (QTIP) election made with respect to the Marital Trust is a nullity for federal gift, estate and generation-skipping transfer (GST) tax purposes.”⁷ (Emphasis added)

PLR 201603004 explains “a nullity for federal gift, estate and generation-skipping transfer (GST) tax purposes.”

You have requested a ruling that, pursuant to Rev. Proc. 2001-38, 2001 C.B. 124, the QTIP election made with respect to the Marital Trust on Form 706 be treated in its entirety as null and void for purposes of Secs. 2044(a), 2056(b)(7), 2519(a), and 2652 of the Internal Revenue Code, insofar as the election was not necessary to reduce the estate tax liability to zero.⁸ (Emphasis added)

IRC Section 2044 is most important to the contention that a QTIP election effects a date-of-death basis at the death of the surviving spouse. Section 2044(a) requires an allowance of a marital deduction before any property is included in the estate of the surviving spouse:

Code Sec. 2044. Certain property for which marital deduction was previously allowed

(a) General rule

The value of the gross estate shall include the value of any property to which this section applies in which the decedent had a qualifying income interest for life.

(b) Property to which this section applies

This section applies to any property if—

(1) a deduction was allowed with respect to the transfer of such property to the decedent -

 (A) under section 2056 by reason of subection (b)(7) thereof (Emphasis added)

Clearly, no marital deduction was allowed, because no marital deduction was needed. In the parlance of Rev. Proc. 2001-38, it was “a nullity for federal gift, estate and generation-skipping transfer (GST) tax purposes,” thus, no date-of-death basis.

Endnotes

1. Section 20.2010-2 Portability provisions applicable to estate of a decedent survived by a spouse.

2. Private Letter Ruling 201615004 (Jan. 11, 2016).

3. Steve Leimberg’s Estate Planning Email Newsletter - Archive Message #2100 (May 20, 2013)

4. PLR 201603004 (Aug. 11, 2015).

5. Ibid.

6. PLR 201345006 (Aug.  5, 2013).

7. Ibid.

8. See supra note 4.