IRD issues when uding IRA to fund QTIP

[Guest AmyK]

Client has a Living Revocable Trust that includes the following:

1) Credit-Shelter ("Family") trust and QTIP Marital Trust;

2) Pecuniary credit-shelter funding formula

Grantor intends that his IRA funds the QTIP marital trust. There is language included in the Trust document that will allow the QTIP to qualify for the marital deduction according to Rev Rul 2000-2.

BUT: I am concerned that the pecuniary funding formula under this trust document may cause IRD issues.

ISSUE: Will the use of the pecuniary formula trigger IRD/income tax for the spouse as beneficiary of the QTIP when the IRA is used to fund the QTIP?

My reading thus far has given conflicting info: I have read that the ENTIRE value of the IRA may be treated as IRD when a pecuniary formula is used. Elsewhere I have read that when a client designates a QTIP trust as beneficiary of an IRA, this does NOT cause recognition of IRD because it is similar to a specific bequest of property.

HELP!!

Should I advise client to restate trust using Fractional formula?

Thanks in advance -

AmyK

[Mary Kay Foss]

I think that you should ask that a switch be made to a fractional formula, the risk of triggering all of that income is too great.