Probate & Trust Law Section Conference Manual ... - Minnesota CLE

spouses are able to use GST exemption while still minimizing estate
taxes with the marital deduction.
c) How it works: First, the personal representative of the estate must
make a standard QTIP election on the estate tax return. Second, on the same
estate tax return, the personal representative must make an election for
purposes of the GST tax provisions to treat all of the property in the QTIP
trust as if the QTIP election had not been made. I.R.C. §2652(a)(3).
d) Authority: The guidance for this election is in the GST code and
regulations. See I.R.C. §§2631, 2632, 2652(a)(3) and the regulations
thereunder. See, e.g., PLR 200742015 (permitting an extension of time to
make a reverse QTIP election).
c. Clayton Contingent QTIP Election
1) An alternative to the traditional marital deduction formula is the use of a
Clayton contingent QTIP election. See Estate of Clayton v. Comm’r, 976 F.2d 1486
(5th Cir. 1992); Treas. Reg. § 20.2036(b)-7(d)(3). Under this method, the surviving
spouse is given a qualifying income interest for life in a QTIP trust. The decedent’s
personal representative or trustee, through the use of a Clayton contingent QTIP
election, can determine how much of the QTIP trust property should be qualified for
the marital deduction. See Sebastian Grassi, Jr., Drafting Flexibility Into Trusts Helps
Cope With Uncertainty, Estate Planning, July 2002. The assets for which the QTIP
election is not made can pass to an alternate trust (or other beneficiary), including a
credit shelter trust or even a trust of which the surviving spouse is not a beneficiary.
This provides significant post-mortem planning flexibility for the fiduciary.
Treasury Regulations § 20.2056(b)-7(d)(3) provides that a qualifying
income interest for life that is contingent upon the personal representative’s election
will not fail to be a qualifying income interest for life because of that contingency or
because the portion of the property for which the election is not made passes to or for
the benefit of persons other than the surviving spouse.
2) A Clayton-style plan does not require the use of a formula in the governing
instrument. The fiduciary has the flexibility to do post-mortem estate tax planning.
The obligation to take action after the death of the first spouse rests with the personal
representative or trustee and not with the surviving spouse. In fact, the surviving
spouse should not be the fiduciary because of a potential conflict of interest. The
pitfalls of a qualified disclaimer do not apply. The election allows the personal
representative, to the extent the QTIP election is not made, to keep principal out of the
survivor’s estate without the requirement to distribute all income to the survivor, thus
reducing the surviving spouse’s gross estate. See Sebastian Grassi, Jr., Drafting
Flexibility Into Trusts Helps Cope With Uncertainty, Estate Planning, July 2002, at
349.
3) In this type of plan, especially, it is important that the personal representative
be someone highly regarded and trusted by the decedent because the personal
representative determines who is entitled to the beneficial shares of the estate: the
surviving spouse or the alternate beneficiaries (typically a credit shelter trust). The
election is made on the decedent’s IRS Form 706, so the personal representative
potentially has fifteen months after the decedent’s death to make the determination.
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