[EstGift] QTIP Purchasing Commercial Annuity/Kite Case

[McCaffrey, Carlyn]

The Kite case is probably incorrectly decided on the QTIP termination issue.   The transaction that was the subject of the case would not have resulted in any estate tax avoidance if the consideration received by the spouse for the sale of the QTIP assets that had been distributed to her had not been a deferred private annuity.   Under those circumstances, the rational of Kite would have led to a double tax on the same assets.  The first tax is the gift tax imposed on value of the QTIP remainder when the QTIP terminated.  The second would be the estate tax imposed on the consideration received by the spouse when she sold the QTIP property to the extent appropriately allocated to the value of the remainder.

The fact, however, that the consideration received for the sale was an annuity played no role in the decision.

There should be no problem with the purchase of a commercial annuity in any event.     Since 100% of the annuity payments will not be treated as income, investment in an annuity will not necessarily result in a zero value of the QTIP when the spouse dies.


CARLYN MCCAFFREY
Partner

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Ellen Schwartzman, Assistant to Carlyn McCaffrey
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From: estgift-bounces at actec.org <estgift-bounces at actec.org> On Behalf Of Day, Eileen
Sent: Saturday, July 20, 2019 11:41 AM
To: 'EstGift at actec.org' <EstGift at actec.org>
Subject: [EstGift] QTIP Purchasing Commecial Annuity/Kite Case

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

STINSON LLP
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