In IRS Memorandum 202118008, the Office of Chief Counsel has ruled that a surviving spouse was treated as making a gift of all of the interests in a qualified terminable interest property (QTIP) trust other than the qualifying income interest when the trust was commuted. The conclusion is as follows:
- The commutation of the trust is a disposition of the surviving spouse’s qualifying income interest within the meaning of § 2519(a), and thus, the surviving spouse is treated as making a gift of all of the interests in the trust other than the qualifying income interest.
- The distribution of all of the trust property to the surviving spouse constitutes a transfer of the remainder interest and a gift by the remainder beneficiaries under § 2511.
- The commutation and the distribution of all of the trust property to the surviving spouse are separate gift transfers by separate donors, the surviving spouse and the remainder beneficiaries, that do not offset each other.
- The value of the surviving spouse’s § 2519 gift to the remainder beneficiaries is the fair market value of all of the interests in the trust less the present value of the qualifying income interest on the date of disposition (as determined under § 7520).
- The value of the remainder beneficiaries’ gifts under § 2511 to the surviving spouse is the value of their remainder interest in the trust. In the absence of the trustee’s computation of this amount, the Service will make its own determination pursuant to the valuation rules set forth in § 7520
Posted by Jessica Ji, Associate Editor, Wealth Strategies Journal.