GST Rules for Trust Changes and QPRTs

The stated conditions govern modifying a GST-exempt trust without changing its exempt status. Timing rules also apply to reverse QTIP elections, QPRT exemption allocation and the estate tax inclusion period.

When a trust change preserves GST exemption

In Private Letter Ruling 201647001, the proposed modifications to a GST-exempt trust were mostly administrative. The IRS concluded they would not affect the trust's GST status or its exempt status because they would not shift beneficial interests to a lower generation or extend vesting time.^[3]

The ruling's conclusion applies to the trust terms and facts presented.^[1]

Reverse QTIP election timing

A reverse QTIP election is made on the first-to-die spouse's timely filed estate tax return. Once made, it cannot be undone, and the first spouse is treated as transferor of the entire QTIP trust for GST purposes.^[2]

That transferor treatment can allow the first spouse's GST exemption to be allocated to QTIP assets. The election relates to a trustee's authority under state law or the trust instrument to divide the QTIP trust into exempt and nonexempt shares for GST purposes.^[2]

QPRT allocation and the estate tax inclusion period

GST exemption allocation to a QPRT transfer is delayed until the trust's term ends when the estate tax inclusion period applies. A 15-year QPRT term prevents allocation during that term because the property may be included in the taxpayer's estate if death occurs before the term ends.^[2]

More generally, exemption cannot be allocated to property retained in an interest that would cause estate inclusion until the estate tax inclusion period closes. A QPRT right to live in a house and a GRAT annuity are examples of retained interests that may cause estate inclusion.^[5]

When the period closes, the exemption amount needed to cover the property is based on its value at that time. For a QPRT, the applicable exemption is allocated after the term ends.^[2]

The period ends no later than the transferor's death or the first generation-skipping transfer of the property.

Questions and answers

When is a reverse QTIP election made?

It is made on the first-to-die spouse's timely filed estate tax return. Once made, it cannot be undone, and the first spouse is treated as transferor of the entire QTIP trust.^[2]

When can GST exemption be allocated to a QPRT transfer?

For a QPRT with a 15-year term, allocation waits until the term ends because the property may be included in the taxpayer's estate if death occurs during the term. The amount needed is based on the property's value at the end of the term.^[2]

When can GST exemption be allocated to property in an estate tax inclusion period?

Exemption cannot be allocated to property held in a retained interest that would cause estate inclusion until the estate tax inclusion period closes. For a QPRT, that allocation is delayed until the trust's term ends.^[5]

Related glossary terms

Income for the benefit of the grantor: Section 677 treats a grantor as owner of a trust portion when income can benefit the grantor or spouse, including through certain life insurance premiums.
Power to control beneficial enjoyment: Section 674 describes when control over trust benefits causes a grantor to be treated as owner of a trust portion. The rule concerns beneficial enjoyment.
Transfer to a foreign trust: Form 3520 covers direct and indirect transfers of money or property to a foreign trust, including gratuitous transfers, alongside the U.S. ownership rules.