Marital Trust Division Deemed a Non-Recognition Event, but Tax Implications Abound

The Internal Revenue Service released Private Ruling 201834011 on August 24, 2018, in which the IRS ruled that the proposed division of a marital trust into two separate trusts (Trust 1 and Trust 2, for simplicity) would neither trigger income or capital gain recognition nor preclude either trust from qualifying for treatment as qualified terminable interest property trusts, known as a QTIP trust.

Six issues were raised in the ruling, with each issue regarding different tax implications. Issues included whether IRC Section 2044(a) would cause the value of the surviving spouse’s deemed Section 2519 (remainder interest) gift of Trust 1’s remainder to be included in surviving spouse’s gross estate, whether the surviving spouse’s non-qualified disclaimer of all beneficial interests in Trust 1 (Renunciation) would trigger another deemed IRC Section 2519 gift from her with respect to Trust 2’s remainder, and whether the Renunciation would cause the surviving spouse’s interest in Trust 2 to be valued at zero under IRC Section 2702.

The ruling explained that IRC Section 2044(a) would not trigger because of the language of Section 2044(b), thus allowing the income interest property to not be a part of the surviving spouse if it was deemed a Section Section 2519 gift. The ruling held in the fourth and fifth issue that the Renunciation would not cause the surviving spouse’s continuing interest in Trust 2 to be valued at zero under Section 2702 because the two Resulting Trusts were to be analyzed as truly separate trusts.

See Stephen J. Putnoki-Higgins, Marital Trust Division Deemed a Non-Recognition Event, but Tax Implications Abound, Wealth Management, September 12, 2018.

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