Seymour Goldberg Answers the “QTIP Conundrum”

In 2008, the National Conference of Commissioners on Uniform State Laws implemented amendments to the Model Uniform Principal and Income Act (UPAIA).  Of the amendments to the UPAIA was Section 505, entitled “Income Taxes.”  This amendment addresses income tax issues that are prompted by a trust that has interests in a pass-through entity, such as a Limited Liability Company (LLC) or partnership.  The 2008 amendments provide a formula to compute how much the trust needs to distribute to the mandatory income beneficiary and how much it needs to retain in order to pay its fiduciary income tax liability tax obligations.  Thus, the trust preserves the essential funds to pay its fiduciary income tax obligations with the balance of the cash distribution paid to the mandatory income beneficiary. 

Seymour Goldberg presents a problem on the interaction between the UPAIA and Income Act and the ownership of pass-through entities that are bequeathed to trusts for the benefit of a surviving spouse that could consequently jeopardize qualified terminable interest property (QTIP) treatment.  Outlining the problem through detailed examples and comprehensive explanations, Mr. Goldberg notes that the IRS has yet to come up with an easy fix for this issue.  “Over 30 states have adopted the revised version of the UPAIA.  It would be a disaster if the state trust law drafted in good faith to protect the trustee from a fiduciary income tax liability funding issue in essence destroyed the QTIP marital deduction with respect to a significant asset held by the estate.” 

To advance this effort, Mr. Goldberg has sent a letter to the Treasury Department requesting that it address these issues by providing some form of guidance that would protect existing estate plans from potentially adverse penalties. 

See Seymour Goldberg, QTIP Conundrum, CCH Estate Planning Review, Sept. 18, 2014.

Special thanks to Seymour Goldberg (Goldberg & Goldberg, P.C.) for bringing this article to my attention.