[Code of Federal Regulations]
[Title 26, Volume 14]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR26.2652-2]

[Page 726-727]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 26_GENERATION-SKIPPING TRANSFER TAX REGULATIONS UNDER THE TAX REFORM ACT OF 1986--Table of Contents
 
Sec.  26.2652-2  Special election for qualified terminable interest property.

    (a) In general. If an election is made to treat property as 
qualified terminable interest property (QTIP) under section 2523(f) or 
section 2056(b)(7), the person making the election may, for purposes of 
chapter 13, elect to treat the property as if the QTIP election had not 
been made (reverse QTIP election). An election under this section is 
irrevocable. An election under this section is not effective unless it 
is made with respect to all of the property in the trust to which the 
QTIP election applies. See, however, Sec.  26.2654-1(b)(1). Property 
that qualifies for a deduction under section 2056(b)(5) is not eligible 
for the election under this section.
    (b) Time and manner of making election. An election under this 
section is made on the return on which the QTIP election is made. If a 
protective QTIP election is made, no election under this section is 
effective unless a protective reverse QTIP election is also made.
    (c) Transitional rule. If a reverse QTIP election is made with 
respect to a trust prior to December 27, 1995, and GST exemption has 
been allocated to that trust, the transferor (or the transferor's 
executor) may elect to treat the trust as two separate trusts, one of 
which has a zero inclusion ratio by reason of the transferor's GST 
exemption previously allocated to the trust. The separate trust with the 
zero inclusion ratio consists of that fractional share of the value of 
the entire trust equal to the value of the nontax portion of the trust 
under Sec.  26.2642-4(a). The reverse QTIP election is treated as 
applying only to the trust with the zero inclusion ratio. An election 
under this paragraph (c) is made by attaching a statement to a copy of 
the return on which the reverse QTIP election was made under section 
2652(a)(3). The statement must indicate that an election is being made 
to treat the trust as two separate trusts and must identify the values 
of the two separate trusts. The statement is to be filed in the same 
place in which the original return was filed and must be filed before 
June 24, 1996. A trust subject to the election described in this 
paragraph is treated as a trust that was created by two transferors. See 
Sec.  26.2654-1(a)(2) for special rules involving trusts with multiple 
transferors.
    (d) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. Special (reverse QTIP) election under section 2652(a)(3). 
T transfers $1,000,000 to a trust providing that all trust income is to 
be paid to T's spouse, S, for S's lifetime. On S's death, the trust 
principal is payable to GC, a grandchild of S and T. T elects to treat 
all of the transfer as a transfer of QTIP and also makes the reverse 
QTIP election for all of the property. Because of the reverse QTIP 
election, T continues to be treated as the transferor of the property 
after S's death for purposes of chapter 13. A taxable termination rather 
than a direct skip occurs on S's death.
    Example 2. Election under transition rule. In 1994, T died leaving 
$4 million in trust for the benefit of T's surviving spouse, S. On 
January 16, 1995, T's executor filed T's Form 706 on which the executor 
elects to treat the entire trust as qualified terminable interest 
property. The executor also makes a reverse QTIP election. The reverse 
QTIP election is effective with respect to the entire trust even though 
T's executor could allocate only $1 million of GST exemption to the 
trust. T's executor may elect to treat the trust as two separate trusts, 
one having a value of 25% of the value of the single trust and an 
inclusion ratio of zero, but only if the election is made prior to June 
24, 1996. If the executor makes the transitional election, the other 
separate trust, having a value of 75% of the value of the single trust 
and an inclusion ratio of one, is not treated as subject to the reverse 
QTIP election.
    Example 3. Denominator of the applicable fraction of QTIP trust. T 
bequeaths $1,500,000 to a trust in which T's surviving spouse, S, 
receives an income interest for life. Upon the death of S, the property 
is to remain in trust for the benefit of C, the child of T and S. Upon 
C's death, the trust is to terminate and the trust property paid to the 
descendants of C. The bequest qualifies for the estate tax marital 
deduction under section 2056(b)(7) as QTIP. The executor does not make 
the reverse QTIP election under section 2652(a)(3). As a result, S 
becomes the transferor of the trust at S's death when the value of the 
property in the QTIP trust is included in S's gross estate under section 
2044. For purposes of computing the applicable fraction with respect to 
the QTIP trust upon S's death, the denominator of the fraction is 
reduced by any Federal estate tax (whether imposed

[[Page 727]]

under section 2001, 2101 or 2056A(b)) and State death tax attributable 
to the trust property that is actually recovered from the trust.