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

GSTT election or a portability election, but you can’t do both. Well the answer to
that dilemma is not certain, but it is not clear either.
1. Example 1. When H dies in 2013 he devised the entire $5,250,000 estate
into a QTIP Trust for W. In that case portability is elected to transfer his
DSUE of $5,250,000 to W. At the same time, the estate for H elects to
make a reverse QTIP election and apply H’s GSTT exemption to the QTIP
Trust. When W dies in December 2013 the QTIP Trust is worth
$6,000,000. In this case, the Trust is exempt of GSTT, but H’s portability
election does not exempt $750,000 of the Trust (but W’s exemption
probably does).
Rev. Proc. 2001-38. In Rev. Proc. 2001-38 the IRS provided the taxpayer
a procedure that if a QTIP election is made when it was not necessary to
reduce estate taxes then the QTIP election (including GSTT elections) are
void. This is helpful, for example, to a taxpayer who accidentally makes a
QTIP election for a credit shelter trust or other similar mistake. What is
unclear in the Rev. Proc. is whether the IRS can, on its own initiative, void
a QTIP election when it was not needed. If an estate funds a QTIP trust to
allocate GST Exemption and use portability planning as well, the IRS
might be able to void the QTIP election. This is a particularly difficult
situation for states like Minnesota. First, if a return is modified by the
taxpayer or IRS, the taxpayer is supposed to inform the Minnesota
Department of Revenue under Minn. Stat. § 289A.38 Subds. 7, 8, 9.
Therefore the Minnesota Department of Revenue may tax such
adjustments. Also, the status of partial State QTIP’s in Minnesota is still a
complicated matter. Note Rev. Notices #10-03 (revoked) and # 12-05.
2. Example 2. H1 dies with a $4,000,000 estate. A QTIP election is made for
the estate placed in an otherwise qualified trust. When W dies, if the Trust
is worth $5,000,000, instead of using the whole $5,000,000 DSUE to
shelter the QTIP trust from tax, the taxpayer would try to void the QTIP
election. Then the estate would have a DSUE of $1,000,000 for W’s estate
(because the trust is funded as a credit shelter trust in H1’s estate at
$4,000,000 that appreciates to $5,000,000) and none of the trust is in W’s
estate. On the other hand, if the trust lost value to $3,000,000, the taxpayer
would not void the QTIP election and has $2,000,000 of DSUE to apply to
W’s estate.
B. Grantor Trusts. As we learned at the end of 2012, lifetime exemption gifting with
the aid of grantor trusts allows the taxpayer to allocate GST exemption and make
lifetime gifts to supercharge a trust. Unlike GRAT’s and other ETIP trusts, the tax
benefits of gifting are immediate. Consuming DSUE with GST exemption in
grantor trusts is a great opportunity to leverage GST and exemption gifting.
C. Income vs. Estate Tax. The Minnesota Estate tax reaches its highest rate at 16%.
The income tax rates are at 39% and rising and even capital gains rates are at 20%
- 9 -