[EstGift] QTIP Purchasing Commecial Annuity/Kite Case

[Day, Eileen]

Estate/Gift Listserv: Any thoughts on a QTIP trust investing in a commercial annuity purchased on the life of surviving spouse/QTIP beneficiary?

The Kite case (2013) seems to raise troubling consequence of a gift under 2519. Particularly, the statements that the intent of the QTIP rules are to defer the tax and then pay tax on the QTIP assets on the death of the surviving spouse.

In Kite, the Tax Court held that a 10-year deferred annuity constituted adequate and full consideration for a transfer of family partnership interests, even though the transferor died before receiving any payments. The court also held that the liquidation of a qualified terminable interest property trust and subsequent sale of its assets constituted a step transaction which in effect was the disposition of the qualifying income interest for life, resulting in a deemed transfer of the entire trust under section 2519. The court recognized that the mere conversion of the property into other property in which she had a qualifying income interest for life is not subject to Section 2519’s gift mechanism. Hard to square both of those conclusions.

Would conversion of QTIP assets into an annuity that has no remainder value be a gift of the remainder? Would it make a difference if the payments are guaranteed after death if the annuitant dies before receiving the entire stream of payments?

Eileen M. Day
Partner

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