Estate planning does not end at the first spouse’s death. The personal representative faces a series of tax elections during estate administration that can significantly affect the family’s total tax liability. These postmortem decisions interact with each other and with the estate plan’s formula provisions, creating opportunities to optimize the result with the benefit of hindsight.
The personal representative’s postmortem elections are often more valuable than the planning done during life, because they are made with actual facts rather than projections. The estate’s actual value, the current tax rates, the surviving spouse’s financial situation, and the investment environment are all known at the time of the election.
The QTIP Election: Calibrating the Marital Deduction
The most powerful postmortem election is the decision whether (and to what extent) to elect QTIP treatment for the marital trust. Under IRC § 2056(b)(7), the personal representative can make a partial QTIP election, treating only a portion of the marital trust as qualified terminable interest property.
A partial QTIP election allows the personal representative to claim exactly the right amount of marital deduction. If the estate is smaller than expected (and the full marital deduction is not needed to eliminate tax), the personal representative can make a partial election, directing some property to the credit shelter portion (sheltered by the unified credit) and less to the marital deduction portion. If the estate is larger than expected, the personal representative can make a full election to maximize the deduction.
This fine-tuning capability is unique to the QTIP trust. No other marital trust form allows the personal representative to adjust the deduction after death. The QTIP election is the single most important reason why the QTIP trust dominates modern estate planning.
To understand how partial elections work and the postmortem flexibility they provide, explore QTIP trusts and their postmortem election flexibility.
The IRC § 642(g) Swing Item Election
Administration expenses (attorney’s fees, executor’s commissions, accounting fees, appraisal costs) can be deducted either on the estate tax return (Form 706) under IRC § 2053 or on the estate’s income tax return (Form 1041) under IRC § 642(g), but not both. The personal representative must choose where to claim each deduction.
The choice depends on the marginal tax rates. If the marginal estate tax rate (40%) exceeds the marginal income tax rate, the estate tax deduction produces a larger tax savings. Under current law, the top individual income tax rate is 37% (plus 3.8% net investment income tax for some income), so the comparison is close. The personal representative must calculate the tax savings under each option for each expense.
The swing item election interacts with the marital deduction. If administration expenses are deducted on the estate tax return, they reduce the taxable estate. This means less marital deduction is needed, and more property passes to the credit shelter trust. If expenses are deducted on the income tax return, the estate tax computation is unaffected, and the marital deduction is larger.
The estate plan’s formula clause must accommodate this choice between tax treatments. Some formulas explicitly reference the IRC § 642(g) election; others leave it to the personal representative’s discretion. The tax elections clause in the trust document should authorize the personal representative to make this election without liability for the consequences.
The Reverse QTIP Election for GST Planning
IRC § 2652(a)(3) allows the personal representative to elect to treat a QTIP trust as if the QTIP election had not been made, solely for GST tax purposes. This “reverse QTIP election” keeps the first spouse as the transferor for GST purposes, allowing the first spouse’s GST exemption to be allocated to the QTIP trust.
The reverse QTIP election is valuable when the first spouse’s GST exemption exceeds the amount allocated to the credit shelter trust. By making the reverse QTIP election on a separate QTIP trust, the excess GST exemption can shelter additional property from the GST tax across multiple generations.
The reverse QTIP election requires a separate QTIP trust (it cannot be made for a portion of a single trust), so the estate plan must create at least two marital trusts if this election is part of the strategy.
GST Exemption Allocation
The personal representative must allocate the first spouse’s GST exemption among the various trusts and transfers in the estate. The allocation is irrevocable once made (on a timely filed return) and determines which trusts are “GST exempt” (inclusion ratio of zero) and which are not.
The allocation strategy depends on the funding approach. In a pecuniary bequest plan, the allocation is made after the trust shares are determined. In a fractional plan, the allocation applies to the fractional shares. The interaction between the funding formula and the GST exemption allocation is one of the more complex aspects of postmortem planning.
The IRC § 2013 Previously Taxed Property Credit
If the surviving spouse dies within ten years of the first spouse, the surviving spouse’s estate may claim a credit under IRC § 2013 for estate tax paid at the first death on property also taxed at the second death. The credit starts at 100% if both deaths occur within two years. It decreases by 20% for each additional two-year period.
The IRC § 2013 credit interacts with the QTIP election: property included in the surviving spouse’s estate under IRC § 2044 (QTIP property) was not taxed at the first death (because the marital deduction offset the tax). The IRC § 2013 credit applies only to property that was actually taxed, so it is most relevant when the personal representative chose not to make a full QTIP election (leaving some property taxed at the first death for credit shelter purposes).
The IRC § 2207A Right of Recovery
When QTIP trust property is included in the surviving spouse’s gross estate under IRC § 2044, the surviving spouse’s estate has a statutory right under IRC § 2207A to recover the estate tax attributable to the QTIP inclusion from the QTIP trust beneficiaries. The surviving spouse can waive this right in the surviving spouse’s will.
Whether to waive IRC § 2207A recovery is itself a planning decision. Waiving it means the surviving spouse’s non-QTIP beneficiaries bear a larger share of the estate tax. Not waiving it means the QTIP trust beneficiaries (often the first spouse’s children) bear the tax attributable to the QTIP property. The decision depends on the family dynamics and the first spouse’s intent.
Coordinating Postmortem Elections
These elections do not operate independently. The QTIP election affects the size of the marital deduction. The IRC § 642(g) election affects the size of the taxable estate (and therefore the optimal QTIP election). The GST exemption allocation depends on which trusts exist after the QTIP election. The IRC § 2013 credit depends on what was taxed at the first death.
The personal representative (with the guidance of an estate planning attorney and tax advisor) must evaluate all elections together, modeling different scenarios to find the combination that minimizes the family’s total tax liability across both deaths. The tax elections clause in the trust document should give the personal representative broad authority to make these interconnected decisions.
To see how the estate plan’s formula provisions interact with these elections, learn how funding formula clauses divide the estate between trusts.