What Is IRC 2652 and the Reverse QTIP Election?

The federal tax system includes a tax on wealth transferred to individuals who are significantly younger than the person making the gift, known as the Generation-Skipping Transfer (GST) tax. It is designed to prevent families from avoiding estate taxes for more than one generation. When assets are passed to grandchildren or more remote descendants, this tax may apply in addition to any estate or gift taxes.

Internal Revenue Code (IRC) Section 2652 is a part of the federal tax law that provides foundational definitions for applying the GST tax. This section clarifies who is considered the person making the transfer and what constitutes a trust for these tax purposes, establishing the default treatment of various transfers.

Core Definitions for GST Tax

The tax code defines the “transferor” as the central figure in any transaction subject to GST tax. In most cases, this is the individual who makes a gift during their lifetime or the decedent whose estate is passing assets at death. The identity of the transferor is directly linked to whose GST tax exemption can be applied to a given transfer.

A rule relates to a specific type of trust known as a Qualified Terminable Interest Property (QTIP) trust. These trusts are often used by married couples to provide for a surviving spouse while controlling the ultimate disposition of the assets. For estate tax purposes, assets in a QTIP trust are included in the surviving spouse’s estate.

Consequently, the general rule under the GST tax system is that the surviving spouse becomes the transferor of the QTIP assets upon their death. This default treatment means that the first spouse to die cannot allocate their personal GST tax exemption to the assets held within the QTIP trust, creating a planning issue where the first spouse’s exemption could be lost.

The Reverse QTIP Election

The Reverse QTIP election is a tool that addresses a challenge in estate planning for married couples. It allows the executor of the first deceased spouse’s estate to make a special election. This election treats the property within a QTIP trust as if the QTIP election had not been made, but this treatment applies exclusively for the purposes of the GST tax. For all other tax considerations, the trust remains a standard QTIP trust.

The primary purpose of this election is to enable the estate of the first spouse to die to allocate their GST exemption to the assets funding the QTIP trust. Without this election, the surviving spouse would become the transferor of the QTIP assets at their death, and only the surviving spouse’s GST exemption could be applied. For 2025, the federal GST exemption is $13.99 million per person, and this amount is scheduled to be reduced by about half at the end of 2025.

Consider a scenario where a husband dies, leaving $5 million in a QTIP trust for his wife. His will directs that upon his wife’s death, the remaining trust assets will be distributed to their grandchildren. For estate tax purposes, his estate takes a marital deduction for the $5 million, and the assets are not taxed at his death. Without a Reverse QTIP election, his wife becomes the transferor for GST tax purposes.

If she has already used her own GST exemption, the entire $5 million transfer to the grandchildren could be subject to the GST tax. By making the Reverse QTIP election, the husband’s executor changes this outcome. The husband remains the transferor of the QTIP trust for GST tax purposes only. His executor can then allocate his available GST exemption to the trust.

If his full exemption is allocated, the trust can be designated as having a zero “inclusion ratio,” effectively shielding it from any future GST tax when the assets are distributed to the grandchildren after the wife’s death.

Information Required for the Election

The Reverse QTIP election is formally made on Form 706, the United States Estate (and Generation-Skipping Transfer) Tax Return. The executor must complete the relevant sections of Schedule R, which is dedicated to the Generation-Skipping Transfer Tax.

The executor must gather several key pieces of information. This includes the decedent’s full name and Social Security Number (SSN), as well as the name and Employer Identification Number (EIN) of the QTIP trust for which the election is being made. The executor will also need the precise value of the trust principal that will be subject to the election, which should correspond to the amount of the decedent’s GST exemption being allocated.

The instructions for Form 706 provide specific guidance on how to execute the election. The executor must explicitly identify the QTIP trust on Schedule R and list the property that is subject to this special treatment. It is important to obtain the most current version of Form 706 and its instructions from the official IRS website to ensure compliance.

Making the Election Filing

Once Form 706 has been fully prepared and the election is indicated on Schedule R, it must be submitted. All paper-filed Forms 706 are sent to a single IRS processing center in Kansas City, Missouri. It is important to verify the correct address in the most recent Form 706 instructions before sending.

For proof of timely filing, many representatives send the Form 706 via certified mail with a return receipt requested. This provides a dated receipt from the U.S. Postal Service and confirmation that the IRS has received the document, which can be valuable in case of future inquiries.

After the return is filed, the IRS no longer automatically issues an estate tax closing letter. The executor must formally request a closing letter and pay a user fee after a certain period has passed. As an alternative, the IRS now permits executors to use an official account transcript to confirm that the return has been processed and accepted as filed.