885 / What is a reverse QTIP election and how is it made for GST tax purposes?

A qualified terminable interest property (QTIP) election can be made to qualify property for the estate tax (see Q 847) and gift tax (see Q 912) marital deductions. A reverse QTIP election may be made for such property under the GST tax. The effect of making the reverse QTIP election is to have the decedent or the donor treated as the transferor (see Q 875) for GST tax purposes. If a reverse QTIP election is made for property in a trust, the election must be made for all of the property in the trust. However, the Committee Report states that if the executor indicates on the federal estate tax return that separate trusts will be created, such trusts will be treated as separate trusts. In other words, separate trusts can be created so that the QTIP and reverse QTIP election can be made for different amounts, and thus minimize all transfer taxes.¹ See regarding Q 883 for more information on the creation of separate shares from a
single trust.

Example. For example (based on a $5 million exemption) decedent (who has made $500,000 of taxable gifts protected by the unified credit) with a $10,000,000 estate leaves $4,500,000 in a credit shelter trust and $5,500,000 to his surviving spouse in a QTIP trust, reducing his estate tax to zero. (Assume each trust would be subject to GST tax to the extent that the $5,000,000 exemption is not allocated to such trust.) The executor allocates $4,500,000 of the decedent’s $5,000,000 GST tax exemption to the credit shelter trust and makes a reverse QTIP election as to $500,000 of the QTIP property so that the decedent’s full $5,000,000 exemption can be used. The surviving spouse’s $5,000,000 exemption amount may then be used to protect the remaining $5,000,000 of property, and the entire $10,000,000 has escaped GST tax (assuming separate QTIP trusts of $4,500,000 and $500,000 are created).