SEPT. 8, 2000

Estate Talk
Fractional Share Trust Qualifies as QTIP Trust
After Reformation and Disclaimers

The IRS recently ruled that a qualified disclaimer of a right to receive discretionary distributions, coupled with court orders dividing and reforming the trust, allows the executor to qualify a fractional share trust as a QTIP marital trust.

The decedent in this case was survived by her husband and three children. Her will left the residue of her estate to a trust with her husband and children as co-trustees. Her will provided that during the husband’s life, the trustees must make distributions to each other as they deem advisable, provided that no person who would directly benefit by a distribution have power with respect to that distribution. Also, the needs of the husband were to be given priority over those of the children when making distributions.

All three children executed irrevocable disclaimers of their respective shares in the trust distributions. None of them will serve as trustees of the trust, and the executor will petition the court for a substitute co-trustee to serve with the husband. All three children also represent that there are no express or implied agreements that the disclaimed interests are to be given or bequeathed to a person specified by them, and that they have received no compensation for their disclaimers.

The executor also petitioned a court to divide the trust into two separate shares with identical terms, requiring the trust to make annual distributions of income to the husband. The executor intends to treat one of the resulting shares of the trust as qualified terminable interest property (QTIP).

The IRS ruled that disclaimers are qualified disclaimers that are not treated as gifts for federal gift tax purposes, and that the fractional share of the trust qualifies as a QTIP trust under §2056(b)(7). The decedent’s estate may therefore elect to treat property passed to that trust as QTIP property.