The IRS recently ruled that a settlement agreement will not affect a trust’s qualified terminable interest property (QTIP) and reverse QTIP elections or its generation-skipping transfer tax-exempt status.

This Private Letter Ruling (2000-26003) involved a marital trust created by a husband’s will. The husband’s estate filed timely QTIP and reverse QTIP elections for the trust. After the husband’s death, his widow claimed that certain properties included in his gross estate belonged to her either outright or in part as community property. She also alleged that the trustee had improperly exercised his discretion to invade the principal of the trust for her reasonable maintenance, support, comfort, and welfare by refusing to make any distributions of principal to her. In addition, she objected to the trustee’s investment strategy with regard to the QTIP trust.

The widow reached a settlement agreement with the remainder beneficiaries. According to the agreement, she would release her claims for separate and community property in exchange for cash or property. Also, she would release rights to the principal of the QTIP trust.

The IRS ruled that the terms of the settlement agreement will not invalidate the QTIP or reverse QTIP elections, and that the husband will be treated as the transferor of the QTIP property for generation-skipping transfer tax purposes. Since the husband’s transfer to the QTIP trust was not a generation-skipping transfer, it is not subject to generation-skipping transfer tax.