Problems with Estate Tax and QTIP Trusts

Earlier this year, Seymour Goldberg, senior partner at the law firm Goldberg & Goldberg in Woodbury, N.Y., contacted Treasury Secretary Jacob Lew and officials with the Internal Revenue Service regarding the unfavorable estate tax consequences for surviving spouses in many states across the country from the use of QTIP trusts.  

“It appears, based upon certain state trust law changes in many jurisdictions, that the state trust laws as modified may adversely affect estate plans throughout the United States,” he wrote.  Mr. Goldberg noted that the issue can arise when a QTIP trust holds an interest in a limited liability company (LLC) or in a partnership and suggested the IRS could resolve this by way of a Revenue Ruling so practitioners could advise their clients appropriately. 

Many estate practitioners postulate that a decedent’s interest in an LLC or partnership interest be held in trust, which provides for a mandatory income interest to be paid to the surviving spouse at least annually for QTIP trust treatment.  A mandatory income interest under the Uniform Principal and Income Act (UPAIA) “means the right of an income beneficiary to receive net income that the terms of the trust require the fiduciary to distribute.”  Mr. Goldberg states that according to the UPAIA, if an LLC or partnership makes a distribution to a trust, it is considered to be income, except when money is received in partial liquidation, and money received in partial liquidation is considered to be principal. 

“The issue is triggered when the trustee receives a K-1 from an interest in a limited liability company or partnership in an amount that is greater than the actual cash distribution from the interest in said entities.”

See Michael Cohn, Problems Foreseen with Estate Taxes for QTIP Trusts, Accounting Today, Oct. 2, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.