What Is a 2652(a)(3) Reverse QTIP Election?

The reverse QTIP election, referenced under Internal Revenue Code Section 2652, is a tax strategy available in estate planning for married couples. It works with specific types of trusts to maximize tax savings across multiple generations. The primary purpose is to optimize the use of a couple’s Generation-Skipping Transfer (GST) tax exemption, an allowance that shields wealth from a substantial federal tax.

This election allows the estate of the first spouse to die to apply their GST exemption to assets held in a trust for the benefit of the surviving spouse. By doing so, it ensures that the first spouse’s exemption is not wasted. The election represents a specific deviation from the default tax rules and requires a deliberate choice to be made on the federal estate tax return.

Understanding the Core Concepts

The Generation-Skipping Transfer (GST) Tax

The Generation-Skipping Transfer (GST) tax is a federal tax on property transfers to individuals two or more generations younger than the donor. These recipients are called “skip persons,” most commonly a grandchild. The definition can also include other relatives or unrelated individuals at least 37.5 years younger than the person transferring the assets.

The GST tax was enacted to prevent families from passing wealth to grandchildren to skip the estate tax that would have been due at their children’s death. The tax is levied at a rate equal to the highest federal estate tax rate. It applies to direct gifts, transfers from a trust, or terminations of a trust interest that benefit a skip person.

The GST Exemption

Every individual has a lifetime GST exemption, a specific dollar amount that can be allocated to transfers to shield them from the GST tax. For 2025, the GST exemption is $13.99 million per person. This higher amount is temporary and scheduled to sunset at the end of 2025.

On January 1, 2026, the exemption will revert to its pre-2017 level of approximately $5 million, adjusted for inflation, unless Congress extends it. The exemption can be used during an individual’s lifetime for gifts to skip persons. Any unused portion is available to be allocated by the executor of the individual’s estate upon their death. Properly allocating this exemption is a key part of multigenerational estate planning.

Qualified Terminable Interest Property (QTIP) Trusts

A Qualified Terminable Interest Property (QTIP) trust allows a decedent to provide income for their surviving spouse for life. The decedent controls the ultimate disposition of the trust assets after the surviving spouse dies, directing them to children or other beneficiaries. Assets placed in a QTIP trust qualify for the unlimited marital deduction and are not taxed in the first spouse’s estate.

However, a challenge arises for GST tax planning due to a default tax rule. For GST tax purposes, the surviving spouse is treated as the “transferor” of the QTIP trust assets upon their death. This means only the surviving spouse’s GST exemption can be allocated to the trust, and the first spouse’s exemption cannot be used for those assets.

The Purpose and Mechanics of the Reverse QTIP Election

The purpose of the reverse QTIP election is to override the default tax rule that treats the surviving spouse as the transferor of QTIP trust assets. By making this election, the estate of the first spouse to die is treated as the transferor for GST tax purposes. This “reverses” the standard treatment and allows the first decedent’s GST exemption to be allocated to the property within the QTIP trust. This prevents the loss of the first spouse’s GST exemption, ensuring both spouses can use their exemptions to maximize the wealth passed to future generations free of GST tax.

A common and effective strategy involves splitting a single QTIP trust into two separate trusts, as directed by the trust document. One trust, the “exempt QTIP,” is funded with an amount exactly equal to the decedent’s remaining GST exemption. The reverse QTIP election is made for this trust, and the decedent’s GST exemption is allocated to it, making it fully exempt from GST tax.

The remaining assets are placed into a second “non-exempt QTIP” trust. No reverse QTIP election is made for this trust, so the surviving spouse remains the transferor for GST tax purposes. This structure is more efficient than a single, partially exempt trust, as distributions to skip persons can be made exclusively from the fully exempt trust.

Information Required to Make the Election

Before an executor can make the reverse QTIP election, specific information must be gathered. The process requires coordination between the executor, legal counsel, and tax professionals to ensure the election is valid and accurately reflects the decedent’s objectives. The following information is needed:

• The full legal name, Social Security Number, and date of death for the decedent, as well as similar identifying information for the surviving spouse and trust beneficiaries.
• A copy of the trust instrument that created the QTIP trust and the trust’s Employer Identification Number (EIN).
• A detailed schedule of the assets funding the QTIP trust, listing each asset and its fair market value as of the decedent’s date of death. Accurate valuation is important for allocating the GST exemption.
• A precise calculation of the decedent’s available GST exemption, which is the total exemption minus any amount used for lifetime gifts.
• The official name of the specific trust to which the election applies, as stated in the trust document.

How to Make the Election on Form 706

The reverse QTIP election is formally made on Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return. This return reports the decedent’s gross estate, calculates any estate tax due, and handles the allocation of the GST exemption. The election must be made on a timely filed Form 706, which is due nine months after the decedent’s date of death, though a six-month extension is available.

The specific action takes place on Schedule R – Generation-Skipping Transfer Tax, where the executor must identify the trust and property subject to the election. It is also standard practice to attach a statement to the return. This statement should identify the trust by name and EIN, specify the value of the trust assets as of the date of death, and state the amount of GST exemption being allocated to it.

If the election is properly made and the return is accepted, the decedent’s GST exemption will be successfully allocated to the QTIP trust.