[Federal Register Volume 59, Number 40 (Tuesday, March 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3945]
[[Page Unknown]]
[Federal Register: March 1, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 20, 22, 25, and 602
[TD 8522]
RIN 1545-AC67
Estate and Gift Tax Marital Deduction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final regulations relating to the
estate tax and gift tax marital deduction. Changes to the applicable
tax law were made by the Tax Reform Act of 1976, the Revenue Act of
1978, the Economic Recovery Tax Act of 1981, the Technical Corrections
Act of 1982, the Deficit Reduction Act of 1984, the Tax Reform Act of
1986, the Technical and Miscellaneous Revenue Act of 1988, the Omnibus
Budget Reconciliation Act of 1989, and the Energy Policy Act of 1992.
These regulations will provide the public with the guidance needed to
comply with those Acts.
EFFECTIVE DATE: March 1, 1994.
FOR FURTHER INFORMATION CONTACT: Susan Hurwitz, (202) 622-3090 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information requirement contained in this final
regulation has been reviewed and approved by the Office of Management
and Budget in accordance with the requirements of the Paperwork
Reduction Act (44 U.S.C. 3504(h)) under control number 1545-0015. The
estimated annual burden per respondent varies from .1 to .5 hours
depending on individual circumstances, with an estimated average of .25
hours.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be directed to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the Office of Management and Budget,
Attention: Desk Officer for the Department of Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503.
Background
On May 21, 1984, the IRS published in the Federal Register proposed
amendments to the Estate and Gift Tax Regulations (26 CFR part 20 and
part 25) under sections 2044, 2056, 2207A, 2519, 2523, and 6019 of the
Internal Revenue Code (Code) (49 FR 21350). Conforming changes were
proposed for regulations under other sections of the Code. The
amendments implement and provide guidance with respect to sections
2044, 2056, 2207A, 2519, 2523, and 6019 which were added or amended by
the Tax Reform Act of 1976, the Revenue Act of 1978, the Economic
Recovery Tax Act of 1981, and the Technical Corrections Act of 1982.
This project finalizes those amendments. Additionally, revisions have
been made in the final regulations to reflect certain statutory changes
made since the publication of the proposed regulations by the Deficit
Reduction Act of 1984, the Tax Reform Act of 1986, the Technical and
Miscellaneous Revenue Act of 1988, the Omnibus Budget Reconciliation
Act of 1989, and the Energy Policy Act of 1992. Written comments
responding to the Notice of Proposed Rulemaking were received. No
public hearing was requested and none was held. After consideration of
all of the comments regarding the proposed amendments, those amendments
are adopted by this Treasury decision with revisions in response to
those comments. The significant comments and revisions are described
below.
Explanation of Provisions
In response to comments, Sec. 20.2044-1(b), as proposed, has been
revised to include a reference to section 6166. Therefore, property
included in the surviving spouse's gross estate under section 2044 is
treated as passing from such spouse's estate upon such spouse's later
death for purposes of determining whether the estate is eligible to pay
the estate tax liability in installments under section 6166.
In response to comments, Sec. 20.2044-1(c), as proposed, has been
revised to include guidance for taxpayers on the evidence that is
required in order to rebut the presumption that property in which the
surviving spouse had a qualifying income interest for life was deducted
by the first decedent's estate under section 2056(b)(7) or by the donor
spouse under section 2523(f) in determining the prior decedent's estate
or gift tax liability.
Several changes were made in the final regulations regarding the
definition of the term ``specific portion'' as used in sections
2056(b)(5), 2056(b)(7), 2523(e) and 2523(f). In general, a spousal
interest qualifies for the marital deduction under section 2056(b)(5)
or section 2523(e) if the spouse receives an income interest with
respect to the entire interest in property or a ``specific portion'' of
the entire interest, coupled with a general power of appointment over
the entire corpus or a ``specific portion'' of the entire corpus.
Similarly, an interest is eligible for the qualified terminable
interest property (QTIP) election under section 2056(b)(7) or section
2523(f) if the spouse receives an income interest in the entire
interest or a ``specific portion'' of the interest. Under
Secs. 20.2056(b)-5(c) and 25.2523(e)-1(c), in order to constitute a
right to income in, or power over, a specific portion of property, the
right or power must relate to a fraction or percentage share of the
property.
However, in Northeastern Pennsylvania National Bank and Trust Co.
v. United States, 387 U.S. 213 (1967), the United States Supreme Court
held that, for purposes of section 2056(b)(5), a right to receive a
specified periodic payment (e.g., $24,000 per year) from a trust also
constitutes a right to receive the income from a specific portion of
the trust corpus; i.e., the pecuniary amount of corpus that, based on
the assumed rate of return used in the regulations, would generate the
periodic payment. In reaching this conclusion, the Court invalidated
Sec. 20.2056(b)-5(c) to the extent it precluded characterization of a
specific periodic payment as a right to income from a specific portion
of trust corpus.
In Estate of Alexander v. Commissioner, 82 T.C. 34 (1984), aff'd
without opinion (4th Cir. 1985), the Tax Court held that a power of
appointment over a pecuniary amount of trust corpus constituted a power
of appointment over a ``specific portion'' of the trust property thus
qualifying the property for the marital deduction under section
2056(b)(5). The Tax Court felt compelled to reach this decision in view
of the Supreme Court's decision in Northeastern Pennsylvania National
Bank, which applied the term in the context of the requisite spousal
income interest.
The proposed regulations provided amendments to the definition of
the term ``specific portion'' under Secs. 20.2056(b)-5(c) and
25.2523(e)-1 with respect to the requisite spousal income interest that
conform to the Court's decision in Northeastern Pennsylvania National
Bank. In addition, Secs. 20.2056(b)-7(c) and 25.2523(f)-1(c), and
illustrative examples, adopted the Northeastern Pennsylvania National
Bank rule with respect to interests within the purview of section
2056(b)(7) or section 2523(f).
However, section 1941 of the Energy Policy Act of 1992, Public Law
102-486, amended section 2056(b) and section 2523 (e) and (f) to limit
the term ``specific portion'' such that it references a portion
determined only on a fractional or percentage basis. The amendments are
generally effective in the case of estates of decedents dying after
October 24, 1992 (the date of enactment) and to gifts made after that
date, subject to certain transitional rules. The legislative history
underlying the amendments provides that no inference should be drawn
from the legislation regarding the law prior to enactment. H.R. Rep.
No. 1018, 102nd Cong. 2d Sess. 432 (1992).
The definition in the proposed regulations of ``specific portion''
as a fractional or percentage interest has been adopted. However, for
estates coming within the purview of the transitional rule of Public
Law 102-486 the definition of specific portion in the final regulations
adopts the proposed amendments to Secs. 20.2056(b)-5 and 25.2523(e)-1,
which reflect the decision in Northeastern Pennsylvania National Bank.
The corresponding proposed amendments to Secs. 20.2056(b)-7 and
25.2523(f)-1 (and pertinent portions of the proposed amendments to
Secs. 20.2044-1 and 25.2519-1) have also been retained in the final
regulations. In addition, the IRS recognizes that Estate of Alexander
reflects the law prior to enactment of Public Law 102-486, with respect
to interests within the purview of sections 2056(b)(5) and 2523(e) and
the final regulations also incorporate this decision, subject to the
Public Law 102-486 effective date and transitional rules.
The IRS recognizes that some aspects of the 1992 legislation should
be the subject of separate proposed regulations under section
2056(b)(7). For example, the IRS invites comments on the application of
the Energy Policy Act of 1992 to the treatment of annuities as
described in the last sentence of section 2056(b)(7)(B)(ii). Send
comments to: CC:DOM:CORP:T:R, room 5528, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington, DC 20044.
In response to comments, Example 4 of Sec. 20.2056(b)-5(c)(5) has
been revised to eliminate the reference to the office building in the
facts. The example, as revised, focuses on the definition of ``specific
portion'' under section 2056(b)(5) and the amount deductible under the
facts presented. A similar revision was made to Example 4 of
Sec. 25.2523(e)-1(c)(5) which contains similar facts.
In response to comments, Sec. 20.2056(b)-7(b)(3), as proposed, has
been revised to clarify that an executor who is appointed, qualified
and acting within the United States, within the meaning of section
2203, is responsible for making the QTIP election, even with respect to
property that is not in the executor's possession, such as an inter
vivos trust established by the decedent. If there is no executor
appointed, the person in actual or constructive possession of the
qualifying income interest property may make the election.
Paragraph (c) of Sec. 20.2056(b)-7, has been added, in response to
comments, to provide limited circumstances under which a protective
QTIP election is recognized for estate tax purposes. In general, the
protective election will be recognized only if, at the time the return
is filed, a bona fide issue is presented the resolution of which is
uncertain at the time the federal estate tax return is filed, that
concerns whether an asset is includible in the decedent's gross estate,
or the amount or nature of the property the surviving spouse is
entitled to receive. Because of changes made to Schedule M of Form 706,
it was deemed unnecessary to provide for a protective election for a
trust that fails to meet the requirements of section 2056(b)(5). The
availability of a protective gift tax QTIP election was considered but
rejected because of the perceived absence of a need for such an
election.
Section 20.2056(b)-7(d)(3) retains the position of the proposed
regulations that an income interest does not qualify as a qualifying
income interest for life if the income interest is contingent on the
executor's election of QTIP treatment; for example, if the spouse is
entitled to trust income only if the executor makes the QTIP election
with respect to the trust. This issue has been the subject of recent
litigation. Although the Tax Court has agreed with the position of the
proposed regulations, the Eighth Circuit and the Fifth Circuit have
reversed the Tax Court on this issue. Estate of Robertson v.
Commissioner, No. 93-2488 (8th Cir. February 4, 1994), rev'g 98 T.C.
678 (1992); Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir.
1992), rev'g 97 T.C. 327 (1991). See also, Estate of Spencer v.
Commissioner, T.C. Memo 1992-579, appeal docketed, No. 93-1997 (6th
Cir. July 26, 1993). In Estate of Robertson and Estate of Clayton, the
appellate courts found that under section 2056(b)(7)(B), qualified
terminable interest property is defined inter alia as property for
which an election is made. Thus, qualification of property as qualified
terminable interest property is always contingent on the executor's
election. Qualification for the marital deduction is determined as of
the time of death. The IRS continues to believe, consistent with the
conclusion reached by the Tax Court, that if the substantive rights and
interests the spouse receives in trust property are dependent on the
executor's post-death exercise of discretionary authority, the rights
and interests received by the spouse cannot properly be characterized
as qualifying as of the time of death, nor can the rights and interests
received by the spouse be characterized as passing from the decedent to
the spouse, as required under section 2056(a). The appellate courts
take the position that the statutory language supports the allowance of
the marital deduction if the receipt of the requisite substantive
rights and interests is contingent on making the election. This is
inconsistent with the fundamental principle that qualification of an
interest in property for the marital deduction is determined as of the
date of death. Accordingly, the Service believes that the statute does
not authorize a grant of discretion to the executor to create
substantive rights in the spouse, and the final regulations reflect
this position.
Example (14) of Sec. 20.2056(b)-7(e), as proposed, has not been
adopted. This example illustrated that an annuity purchased by an
executor pursuant to a directive of the decedent qualifies as qualified
terminable interest property under section 2056(b)(7). The example was
in conflict with section 2056(b)(1)(C), which provides that a marital
deduction is not allowed with respect to any terminable interest (i.e.,
any interest that will terminate or fail on the occurrence of a
specified event, or due to lapse of time) if the interest is to be
acquired by the executor for the surviving spouse pursuant to the
directions of the decedent (e.g., a will direction to purchase an
annuity for the spouse.) Section 2056(b)(7), which provides an
exception allowing a deduction for terminable interests described in
section 2056(b)(1)(A), does not provide an exception for interests
described in section 2056(b)(1)(C). Section 20.2056(b)-7(c) of the
final regulations reflects this fact.
Section 2056(b)(7)(C), added to the Code by the Technical and
Miscellaneous Revenue Act of 1988, and amended by the Omnibus Budget
Reconciliation Act of 1989, provides for an automatic section
2056(b)(7) election (and deduction) in the case of an annuity
includible in the decedent's gross estate under section 2039, where
only the surviving spouse has the right to receive payments before the
death of the surviving spouse. With respect to the gift tax, the
qualification of a spouse's interest in a joint and survivor annuity
that is the subject of a gift under section 2511 is now governed by
section 2523(f)(6), also added by TAMRA in 1988. This section provides
for an automatic election if only the donor and the donor's spouse have
a right to receive payments prior to the death of the last spouse to
die. Rules governing the application of section 2056(b)(7)(C), as well
as section 2523(f)(6), will be prescribed under regulations to be
proposed under those sections at a later date.
Example 10 of Sec. 20.2056(b)-7(e), as proposed, considered the
treatment of a spousal annuity payable from a decedent's individual
retirement account. In response to comments, this example has been
retained as an illustration of an interest that qualifies as a
qualifying income interest for life under section 2056(b)(7)(B)(ii),
without regard to section 2056(b)(7)(C). However, the IRS recognizes
that the arrangement described in the example may also qualify, at
least in part, for the automatic election and deduction under section
2056(b)(7)(C), and this question will be considered in regulations to
be proposed under that section at a later date.
Section 20.2056(b)-7(b), as proposed, provided that a marital trust
that qualifies under section 2056(b)(7) may be divided into separate
trusts to reflect a partial election with respect to the trust. This
provision has been clarified to specify that the severance of the trust
must occur no later than the termination of the period of estate
administration. Further, the provision has been clarified to indicate
that although the severed trusts must be funded based on fair market
values on the date of division, the trusts need not be funded with a
pro rata portion of each asset. Example 4 of Sec. 20.2056(b)-7(h) has
been added to illustrate this provision.
Section 20.2056(b)-8, as proposed, has been revised to provide that
a charitable remainder trust described in section 664 may qualify for a
marital deduction under section 2056(b)(7) in situations where the
surviving spouse is not the only noncharitable beneficiary of the
charitable remainder trust (e.g., where the trust provides for a
successive life beneficiary on the spouse's death). However, in view of
the enactment of section 1941 of The Energy Policy Act of 1992
(discussed above), this provision is limited in application to those
estates not subject to the 1992 amendments to the Code. A similar
change (with similar limitations) was made to Sec. 25.2523(g)-1, as
proposed, providing that a charitable remainder trust in which the
donor's spouse is a noncharitable beneficiary can qualify as qualified
terminable interest property under section 2523(f), even if the trust
fails to qualify under section 2523(g) (because, for example, the donor
and the donor's spouse are not the only noncharitable beneficiaries of
the trust.)
The IRS requests comments on whether the unitrust or annuity
interest in a charitable remainder trust described in sections
664(d)(1) or (d)(2) qualifies as a qualifying income interest for life
in view of the 1992 amendments. See, e.g., the last sentence of section
2056(b)(7)(B)(ii).
Sections 20.2056(b)-9 and 25.2523(h)-1 have been added to reflect
the addition of sections 2056(b)(9) and 2523(h) (denial of double
deduction) to the Code by the Technical Corrections Act of 1982.
Sections 20.2056(c)-1A and 20.2056(c)-2A, as proposed, have not
been adopted by the final regulations. These sections contained
comprehensive rules for computing the amount of the allowable estate
tax marital deduction in the case of estates of decedents dying in 1977
through 1981. In general, the allowable marital deduction applicable to
these estates was limited in amount to the greater of $250,000 or one-
half of the adjusted gross estate. The section, as proposed, also
contained rules promulgated under the transitional rules accompanying
section 2002(d)(1) of the Tax Reform Act of 1976 (which increased the
limitation on the allowable marital deduction to the greater of
$250,000 or one-half of the adjusted gross estate), and the
transitional rule under section 403(e) of the Economic Recovery Tax Act
of 1981 (which enacted the unlimited marital deduction).
In general, the comprehensive rules discussing the computation of
the amount of the marital deduction under the statutory changes enacted
in 1976 will only apply to the estates of decedents who died in 1977
through 1981 and, in some cases, estates of decedents dying after 1981
if the decedent's will was executed prior to 1982. In view of the
limited continuing applicability of these rules, they have not been
adopted by the final regulations. Similarly, the transitional rules
primarily involved estates of decedents dying after 1981 under wills or
other testamentary instruments executed prior to 1982. Many of the
issues involving the application of these transitional rules have been
settled by litigation. See, e.g., Estate of Niesen v. Commissioner, 865
F.2d 162 (8th Cir. 1988); Estate of Levitt v. Commissioner, 95 T.C. 289
(1990); Estate of Christmas v. Commissioner, 91 T.C. 769 (1988).
Accordingly, the proposed regulations discussing these rules have also
not been adopted. A short reference to these rules has been added to
Sec. 20.2056(a)-1 of the regulations.
Section 22.2056-1 is removed, since this temporary regulation
(which considered the requirements for a partial QTIP election) has
been incorporated into the final regulations contained in this
document.
Section 25.2519-1(c), as proposed, discussed the amount of the gift
under section 2519 if the surviving spouse transfers all or a part of
the spouse's income interest in property subject to a QTIP election
under either section 2056(b)(7) or section 2523(f). Under section
2207A(b), the spouse has a right to recover from the persons receiving
the transferred property any gift tax imposed on the transfer. Section
25.2519-1(a), as proposed, provided that in determining the amount of
the gift under section 2519, the value of the transfer is reduced by
the amount of the gift tax reimbursement. That is, the section 2519
gift was proposed to be treated as a ``net gift.'' See, e.g., Rev. Rul.
75-72, 1975-1 C.B. 310. However, the section 2207A(b) reimbursement
provision could be viewed as shifting the liability for the gift tax
imposed on the transfer to the persons receiving the property.
Arguably, payment by those persons of a gift tax for which they are
liable under the statute should not reduce the amount of the transfer
for gift tax purposes, or otherwise result in net gift treatment. See,
e.g., Rev. Rul. 80-111, 1980-1 C.B. 208. Accordingly, the reference in
Sec. 25.2519-1(c), treating the transfer as a net gift, has been
deleted. The IRS anticipates that the issue regarding net gift
treatment will be the subject of subsequent proposed regulations and
specifically requests comments on this issue.
Section 25.2519-1(a) and Examples 4 and 5 of Sec. 25.2519-1(g) have
been revised to reflect the application of section 2702 as added to the
Code by the Revenue Reconciliation Act of 1990.
Section 25.2523(f)-1(b)(4), as proposed, discussed the manner and
time for making the gift tax qualified terminable interest property
election. That section has been revised in the final regulations in
order to reflect the changes made to section 2523(f)(4)(A) by the Tax
Reform Act of 1986. Under section 2523(f)(4)(A), as amended, the gift
tax election is to be made on or before the date prescribed by section
6075(b) for filing a gift tax return (including extensions authorized
under section 6075(b)(2), relating to automatic extensions of time for
filing a gift tax return where the taxpayer is granted an extension of
time to file the income tax return.) The section, as proposed, has also
been revised to permit QTIP elections to be made on returns for which
extensions have been granted pursuant to section 6081(a) of the Code.
Comments have been received suggesting that an inter vivos transfer
in trust where the donor retains an income interest and the spouse
receives the right to trust income on the termination of the donor's
preceding life income interest should qualify as qualified terminable
interest property under section 2523(f). These comments were rejected.
In general, the statute requires that the spouse must be entitled to
receive the trust income for the spouse's life. An income interest that
commences at some time in the future, if the spouse survives until that
time, is not payable to the spouse for life as required by the statute.
Further, if such an interest were allowed to qualify under section
2523(f), it is problematical whether, in the event the donee spouse
predeceased the donor spouse, the IRS could sustain inclusion of the
trust corpus in the gross estate of the donee spouse under section 2044
(or sustain treating the assignment of the spouse's interest as a
disposition under section 2519), since, as noted above, it is
questionable whether such an interest constitutes a qualifying income
interest for life. Accordingly, Sec. 25.2523(f)-1(c)(2) has been added
to clarify that, in order to constitute a qualifying income interest
for life, the spouse must receive the immediate right to receive the
income from the property.
Examples 9, 10, and 11 of Sec. 25.2523(f)-1(f) have been added,
illustrating the application of section 2523(f)(5) and Sec. 25.2523(f)-
1(d). Under these sections, where the donor spouse retains an interest
in a trust subject to a section 2523(f) QTIP election (e.g., the trust
provides an income interest to the spouse for life, then to the donor
for life, with remainder to children), the trust corpus is not subject
to inclusion in the donor's gross estate under section 2036 (by virtue
of the retained life estate) if the donor predeceases the spouse.
Further, any transfer of the retained interest during the donor's
lifetime prior to the death of the donee spouse is not subject to gift
tax. However, under section 2523(f)(5)(B), this exclusion rule does not
apply if, prior to the donor's death (or the transfer of the interest),
the property is included in the donee spouse's gross estate under
section 2044 or is treated as a gift by the donee spouse under section
2519. The examples clarify, inter alia, that if the property is
included in the donee spouse's gross estate (or is subject to a gift
tax under section 2519), the donee spouse is treated as the transferor
of the property for estate and gift tax purposes. Accordingly, on the
subsequent death of the donor spouse, the donor is not treated as the
transferor of the property in which the donor possesses an income
interest. In such circumstances, notwithstanding section 2523(f)(5)(B),
the property is not includible in the donor's gross estate under
section 2036. However, the property could be subject to inclusion in
the donor's gross estate under another applicable section of the Code,
the application of which is not dependent on the donor's status as a
transferor of the property. For example, if the donee spouse's estate
made an election under section 2056(b)(7) with respect to the property,
then the property would be includible in the donor spouse's gross
estate under section 2044 (a so-called lifetime reverse QTIP trust).
Sections 20.2056(a)-1(a), 20.2056(b)-7(e), 25.2523(a)-(1)(a),
25.2523(a)-1(c) and 25.6019-1, as proposed, have been revised to refer
to the changes made by the Technical and Miscellaneous Revenue Act of
1988 and the Omnibus Budget Reconciliation Act of 1989, in regard to
the availability of the estate tax marital deduction where the
surviving spouse is not a United States citizen and the gift tax
marital deduction where the donee spouse is not a United States
citizen.
Several minor clarifying amendments have been made to the text and
the examples in the proposed regulations to better describe the intent
and scope of those provisions.
Effective Dates
Except as specifically provided in Secs. 20.2044-2, 20.2056(b)-
5(c)(3)(ii) and (iii), 20.2056(b)-7(e)(5), 20.2056(b)-8(b), 25.2519-2,
25.2523(e)-1(c)(3), 25.2523(f)-1(c)(3) and 25.2523(g)-1(b), these
regulations are effective in the case of estates of decedents dying
after March 1, 1994, and to gifts made after that date. With respect to
estates of decedents dying on or before March 1, 1994, or gifts made on
or before that date, taxpayers may rely on any reasonable
interpretation of the statutory provisions. For this purpose, the
proposed regulations published in the Federal Register on May 21, 1984
(49 FR 21350) are considered a reasonable interpretation of the
statutory provisions.
Special Analysis
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866. It
also has been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act
(5 U.S.C. chapter 6) do not apply to these regulations, and therefore,
a Regulatory Flexibility Analysis is not required.
Drafting Information
The principal author of these regulations is Susan Hurwitz of the
Office of Chief Counsel, Internal Revenue Service. Other personnel from
the IRS and Treasury Department participated in developing these
regulations.
List of Subjects
26 CFR Part 20
Estate tax, Reporting and recordkeeping requirements.
26 CFR Part 22
Estate tax, Reporting and recordkeeping requirements.
26 CFR Part 25
Gift taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 20, 22, 25, and 602 are amended as
follows:
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
Paragraph 1. The authority citation for part 20 is revised to read
as follows:
Authority: 26 U.S.C. 7805.
Section 20.2031-7 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5).
Section 20.2031-10 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5).
Section 20.2032-1 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5).
Section 20.2055-2 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(50).
Section 20.2204-1 also issued under 26 U.S.C. 6324A(a).
Section 20.2204-3 also issued under 26 U.S.C. 6324A(a).
Section 20.6324A-1 also issued under 26 U.S.C. 6324A(a).
Section 20.6324B-1 also issued under 26 U.S.C. 6324B.
Par. 1a. The authority citations immediately following
Secs. 20.2031-7, 20.2031-10, 20.2032-1, 20.2055-2, 20.2204-1, 20.2204-
3, 20.6324A-1 and 20.6324B-1 are removed.
Sec. 20.0-1 [Amended]
Par. 2. In Sec. 20.0-1(b)(1), the last sentence is amended by
removing the reference ``20.2056(e)-3'' and adding ``20.2056(d)-1'' in
its place.
Par. 3. Section 20.2012-1 is amended as follows:
a. In paragraph (a), the first sentence is revised to read as set
forth below.
b. In paragraph (d)(2)(ii), the fourth and fifth sentences are
removed.
c. Paragraph (d)(3) is removed.
Sec. 20.2012-1 Credit for gift tax.
(a) In general. With respect to gifts made before 1977, a credit is
allowed under section 2012 against the Federal estate tax for gift tax
paid under chapter 12 of the Internal Revenue Code, or corresponding
provisions of prior law, on a gift by the decedent of property
subsequently included in the decedent's gross estate. * * *
* * * * *
Par. 4. Section 20.2013-4, paragraph (b)(3)(ii) is amended by
removing the second sentence.
Par. 5. Section 20.2014-3 is amended as follows:
a. The concluding text of paragraph (b) immediately following
paragraph (b)(2) is revised to read as set forth below.
b. Paragraph (c), Example (3)(ii), second sentence, is revised to
read as set forth below.
Sec. 20.2014-3 Second limitation.
* * * * *
(b) * * *
Any reduction described in paragraph (b)(1) or (b)(2) of this
section on account of the marital deduction must proportionately take
into account, if applicable, the limitation on the aggregate amount of
the marital deduction contained in Sec. 20.2056(a)-1(c). See
Sec. 20.2014-3(c), Example 3.
(c) * * *
Example 3. * * *
(ii) * * * Assume that the limitation imposed by section 2056(c),
as in effect before 1982, is applicable so that the aggregate allowable
marital deduction is limited to one-half the adjusted gross estate, or
$400,000 (which is 50 percent of $800,000). * * *
* * * * *
Par. 6. Section 20.2044-1 is redesignated Sec. 20.2045-1 and new
Secs. 20.2044-1 and 20.2044-2 are added to read as follows:
Sec. 20.2044-1 Certain property for which marital deduction was
previously allowed.
(a) In general. Section 2044 generally provides for the inclusion
in the gross estate of property in which the decedent had a qualifying
income interest for life and for which a deduction was allowed under
section 2056(b)(7) or 2523(f). The value of the property included in
the gross estate under section 2044 is not reduced by the amount of any
section 2503(b) exclusion that applied to the transfer creating the
interest. See section 2207A, regarding the right of recovery against
the persons receiving the property that is applicable in certain cases.
(b) Passed from. For purposes of section 1014 and chapters 11 and
13 of subtitle B of the Internal Revenue Code, property included in a
decedent's gross estate under section 2044 is considered to have been
acquired from or to have passed from the decedent to the person
receiving the property upon the decedent's death. Thus, for example,
the property is treated as passing from the decedent for purposes of
determining the availability of the charitable deduction under section
2055, the marital deduction under section 2056, and special use
valuation under section 2032A. In addition, the tax imposed on property
includible under section 2044 is eligible for the installment payment
of estate tax under section 6166.
(c) Presumption. Unless established to the contrary, section 2044
applies to the entire value of the trust at the surviving spouse's
death. If a marital deduction is taken on either the estate or gift tax
return with respect to the transfer which created the qualifying income
interest, it is presumed that the deduction was allowed for purposes of
section 2044. To avoid the inclusion of property in the decedent-
spouse's gross estate under this section, the executor of the spouse's
estate must establish that a deduction was not taken for the transfer
which created the qualifying income interest. For example, to establish
that a deduction was not taken, the executor may produce a copy of the
estate or gift tax return filed with respect to the transfer by the
first spouse or the first spouse's estate establishing that no
deduction was taken under section 2523(f) or section 2056(b)(7). In
addition, the executor may establish that no return was filed on the
original transfer by the decedent because the value of the first
spouse's gross estate was below the threshold requirement for filing
under section 6018. Similarly, the executor could establish that the
transfer creating the decedent's qualifying income interest for life
was made before the effective date of section 2056(b)(7) or section
2523(f).
(d) Amount included--(1) In general. The amount included under this
section is the value of the entire interest in which the decedent had a
qualifying income interest for life, determined as of the date of the
decedent's death (or the alternate valuation date, if applicable). If,
in connection with the transfer of property that created the decedent's
qualifying income interest for life, a deduction was allowed under
section 2056(b)(7) or section 2523(f) for less than the entire interest
in the property (i.e., for a fractional or percentage share of the
entire interest in the transferred property), the amount includible in
the decedent's gross estate under this section is equal to the fair
market value of the entire interest in the property on the date of the
decedent's death (or the alternate valuation date, if applicable)
multiplied by the fractional or percentage share of the interest for
which the deduction was taken.
(2) Inclusion of income. If any income from the property for the
period between the date of the transfer creating the decedent-spouse's
interest and the date of the decedent-spouse's death has not been
distributed before the decedent-spouse's death, the undistributed
income is included in the decedent-spouse's gross estate under this
section to the extent that the income is not so included under any
other section of the Internal Revenue Code.
(3) Reduction of includible share in certain cases. If only a
fractional or percentage share is includible under this section, the
includible share is appropriately reduced if--
(i) The decedent-spouse's interest was in a trust and distributions
of principal were made to the spouse during the spouse's lifetime;
(ii) The trust provides that the distributions are to be made from
the qualified terminable interest share of the trust; and
(iii) The executor of the decedent-spouse's estate can establish
the reduction in that share based on the fair market value of the trust
assets at the time of each distribution.
(4) Interest in previously severed trust. If the decedent-spouse's
interest was in a trust consisting of only qualified terminable
interest property and the trust was severed (in compliance with
Sec. 20.2056(b)-7(b) or Sec. 25.2523(f)-1(b) of this chapter) from a
trust that, after the severance, held only property that was not
qualified terminable interest property, only the value of the property
in the severed portion of the trust is includible in the decedent-
spouse's gross estate.
(e) Examples. The following examples illustrate the principles in
paragraphs (a) through (d) of this section, where the decedent, D, was
survived by spouse, S.
Example 1. Inclusion of trust subject to election. Under D's
will, assets valued at $800,000 in D's gross estate (net of debts,
expenses and other charges, including death taxes, payable from the
property) passed in trust with income payable to S for life. Upon
S's death, the trust principal is to be distributed to D's children.
D's executor elected under section 2056(b)(7) to treat the entire
trust property as qualified terminable interest property and claimed
a marital deduction of $800,000. S made no disposition of the income
interest during S's lifetime under section 2519. On the date of S's
death, the fair market value of the trust property was $740,000. S's
executor did not elect the alternate valuation date. The amount
included in S's gross estate pursuant to section 2044 is $740,000.
Example 2. Inclusion of trust subject to partial election. The
facts are the same as in Example 1, except that D's executor elected
under section 2056(b)(7) with respect to only 50 percent of the
value of the trust ($400,000). Consequently, only the equivalent
portion of the trust is included in S's gross estate; i.e., $370,000
(50 percent of $740,000).
Example 3. Spouse receives qualifying income interest in a
fraction of trust income. Under D's will, assets valued at $800,000
in D's gross estate (net of debts, expenses and other charges,
including death taxes, payable from the property) passed in trust
with 20 percent of the trust income payable to S for S's life. The
will provides that the trust principal is to be distributed to D's
children upon S's death. D's executor elected to deduct, pursuant to
section 2056(b)(7), 50 percent of the amount for which the election
could be made; i.e., $80,000 (50 percent of 20 percent of $800,000).
Consequently, on the death of S, only the equivalent portion of the
trust is included in S's gross estate; i.e., $74,000 (50 percent of
20 percent of $740,000).
Example 4. Distribution of corpus during spouse's lifetime. The
facts are the same as in Example 3, except that S was entitled to
receive all the trust income but the executor of D's estate elected
under section 2056(b)(7) with respect to only 50 percent of the
value of the trust ($400,000). Pursuant to authority in the will,
the trustee made a discretionary distribution of $100,000 of
principal to S in 1995 and charged the entire distribution to the
qualified terminable interest share. Immediately prior to the
distribution, the fair market value of the trust property was
$1,100,000 and the qualified terminable interest portion of the
trust was 50 percent. Immediately after the distribution, the
qualified terminable interest portion of the trust was 45 percent
($450,000 divided by $1,000,000). Provided S's executor can
establish the relevant facts, the amount included in S's gross
estate is $333,000 (45 percent of $740,000).
Example 5. Spouse assigns a portion of income interest during
life. Under D's will, assets valued at $800,000 in D's gross estate
(net of debts, expenses and other charges, including death taxes,
payable from the property) passed in trust with all the income
payable to S, for S's life. The will provides that the trust
principal is to be distributed to D's children upon S's death. D's
executor elected under section 2056(b)(7) to treat the entire trust
property as qualified terminable interest property and claimed a
marital deduction of $800,000. During the term of the trust, S
transfers to C the right to 40 percent of the income from the trust
for S's life. Because S is treated as transferring the entire
remainder interest in the trust corpus under section 2519 (as well
as 40 percent of the income interest under section 2511), no part of
the trust is includible in S's gross estate under section 2044.
However, if S retains until death an income interest in 60 percent
of the trust corpus (which corpus is treated pursuant to section
2519 as having been transferred by S for both gift and estate tax
purposes), 60 percent of the property will be includible in S's
gross estate under section 2036(a) and a corresponding adjustment is
made in S's adjusted taxable gifts.
Example 6. Inter vivos trust subject to election under section
2523(f). D transferred $800,000 to a trust providing that trust
income is to be paid annually to S, for S's life. The trust provides
that upon S's death, $100,000 of principal is to be paid to X
charity and the remaining principal distributed to D's children. D
elected to treat all of the property transferred to the trust as
qualified terminable interest property under section 2523(f). At the
time of S's death, the fair market value of the trust is $1,000,000.
S's executor does not elect the alternate valuation date. The amount
included in S's gross estate is $1,000,000; i.e., the fair market
value at S's death of the entire trust property. The $100,000 that
passes to X charity on S's death is treated as a transfer by S to X
charity for purposes of section 2055. Therefore, S's estate is
allowed a charitable deduction for the $100,000 transferred from the
trust to the charity to the same extent that a deduction would be
allowed by section 2055 for a bequest by S to X charity.
Example 7. Spousal interest in the form of an annuity. D died
prior to October 24, 1992, the effective date of the Energy Policy
Act of 1992 (Pub. L. 102-486). See Sec. 20.2056(b)-7(e). Under D's
will, assets valued at $500,000 in D's gross estate (net of debts,
expenses and other charges, including death taxes, payable from the
property) passed in trust pursuant to which an annuity of $20,000 a
year was payable to S for S's life. Trust income not paid to S as an
annuity is to be accumulated in the trust and may not be distributed
during S's lifetime. D's estate deducted $200,000 under section
2056(b)(7) and Sec. 20.2056(b)-7(e)(2). S did not assign any portion
of S's interest during S's life. At the time of S's death, the value
of the trust property is $800,000. S's executor does not elect the
alternate valuation date. The amount included in S's gross estate
pursuant to section 2044 is $320,000 ([$200,000/$500,000] x
$800,000).
Sec. 20.2044-2 Effective dates.
Except as specifically provided in Example 7 of Sec. 20.2044-1(e),
the provisions of Sec. 20.2044-1 are effective with respect to estates
of a decedent-spouse dying after March 1, 1994. With respect to estates
of decedent-spouses dying on or before such date, taxpayers may rely on
any reasonable interpretation of the statutory provisions. For these
purposes, the provisions of Sec. 20.2044-1 (as well as project LR-211-
76, 1984-1 C.B., page 598, see Sec. 601.601(d)(2)(ii)(b) of this
chapter), are considered a reasonable interpretation of the statutory
provisions.
Par. 7. Section 20.2055-6 is added to read as follows:
Sec. 20.2055-6 Disallowance of double deduction in the case of
qualified terminable interest property.
No deduction is allowed from the decedent's gross estate under
section 2055 for property with respect to which a deduction is allowed
by reason of section 2056(b)(7). See section 2056(b)(9) and
Sec. 20.2056(b)-9.
Par. 8. Section 20.2056-0 is added to read as follows:
Sec. 20.2056-0 Table of contents.
This section lists the captions that appear in the regulations
under Secs. 20.2056(a)-1 through 20.2056(d)-2.
Sec. 20.2056(a)-1 Marital deduction; in general.
(a) In general.
(b) Requirements for marital deduction.
(1) In general.
(2) Burden of establishing requisite facts.
(c) Marital deduction; limitation on aggregate deductions.
(1) Estates of decedents dying before 1977.
(2) Estates of decedents dying after December 31, 1976, and before
January 1, 1982.
(3) Estates of decedents dying after December 31, 1981.
Sec. 20.2056(a)-2 Marital deduction; deductible interests and
nondeductible interests.
(a) In general.
(b) Deductible interests.
Sec. 20.2056(b)-1 Marital deduction; limitation in case of life estate
or other ``terminable interest.''
(a) In general.
(b) Terminable interests.
(c) Nondeductible terminable interests.
(d) Exceptions.
(e) Miscellaneous principles.
(f) Direction to acquire a terminable interest.
(g) Examples.
Sec. 20.2056(b)-2 Marital deduction; interest in unidentified assets.
(a) In general.
(b) Application of section 2056(b)(2).
(c) Interest nondeductible if circumstances present.
(d) Example.
Sec. 20.2056(b)-3 Marital deduction; interest of spouse conditioned on
survival for limited period.
(a) In general.
(b) Six months' survival.
(c) Common disaster.
(d) Examples.
Sec. 20.2056(b)-4 Marital deduction; valuation of interest passing to
surviving spouse.
(a) In general.
(b) Property interest subject to an encumbrance or obligation.
(c) Effect of death taxes.
(d) Remainder interests.
Sec. 20.2056(b)-5 Marital deduction; life estate with power of
appointment in surviving spouse.
(a) In general.
(b) Specific portion; deductible amount.
(c) Meaning of specific portion.
(1) In general.
(2) Fraction or percentage share.
(3) Special rule in the case of estates of decedents dying on or
before October 24, 1992, and certain decedents dying after October 24,
1992, with wills or revocable trusts executed on or prior to that date.
(4) Local law.
(5) Examples.
(d) Meaning of entire interest.
(e) Application of local law.
(f) Right to income.
(g) Power of appointment in surviving spouse.
(h) Requirement of survival for a limited period.
(j) Existence of power in another.
Sec. 20.2056(b)-6 Marital deduction; life insurance or annuity
payments with power of appointment in surviving spouse.
(a) In general.
(b) Specific portion; deductible interest.
(c) Applicable principles.
(d) Payments of installments or interest.
(e) Powers of appointment.
Sec. 20.2056(b)-7 Election with respect to life estate for surviving
spouse.
(a) In general.
(b) Qualified terminable interest property.
(1) In general.
(2) Property for which an election may be made.
(3) Persons permitted to make the election.
(4) Manner and time of making the election.
(c) Protective elections.
(1) In general.
(2) Protective election irrevocable.
(d) Qualifying income interest for life.
(1) In general.
(2) Entitled for life to all income.
(3) Contingent income interests.
(4) Income between last distribution date and spouse's date of
death.
(5) Pooled income funds.
(6) Power to distribute principal to spouse.
(e) Annuities payable from trusts in the case of estates of
decedents dying on or before October 24, 1992, and certain decedents
dying after October 24, 1992, with wills or revocable trusts executed
on or prior to that date.
(1) In general.
(2) Deductible interest.
(3) Distributions permissible only to surviving spouse.
(4) Applicable interest rate.
(5) Effective dates.
(f) Joint and survivor annuities. [Reserved]
(g) Application of local law.
(h) Examples.
Sec. 20.2056(b)-8 Special rule for charitable remainder trusts.
(a) In general.
(1) Surviving spouse only noncharitable beneficiary.
(2) Interest for life or term of years.
(3) Payment of state death taxes.
(b) Charitable trusts where surviving spouse is not the only
noncharitable beneficiary.
Sec. 20.2056(b)-9 Denial of double deduction.
Sec. 20.2056(b)-10 Effective dates.
Sec. 20.2056(c)-1 Marital deduction; definition of passed from the
decedent.
(a) In general.
(b) Expectant interest in property under community property laws.
Sec. 20.2056(c)-2 Marital deduction; definition of ``passed from the
decedent to his surviving spouse.''
(a) In general.
(b) Examples.
(c) Effect of election by surviving spouse.
(d) Will contests.
(e) Survivorship.
Sec. 20.2056(c)-3 Marital deduction; definition of passed from the
decedent to a person other than his surviving spouse.
Sec. 20.2056(d)-1 Marital deduction; effect of disclaimers of post-
December 31, 1976 transfers.
(a) Disclaimer by a surviving spouse.
(b) Disclaimer by a person other than a surviving spouse.
Sec. 20.2056(d)-2 Marital deduction; effect of disclaimers of pre-
January 1, 1977 transfers.
(a) Disclaimers by a surviving spouse.
(b) Disclaimer by a person other than a surviving spouse.
(1) Decedents dying after October 3, 1966, and before January 1,
1977.
(2) Decedents dying after September 30, 1963, and before October 4,
1966.
(3) Decedents dying before October 4, 1966.
Par. 9. Section 20.2056(a)-1 is revised to read as follows:
Sec. 20.2056(a)-1 Marital deduction; in general.
(a) In general. A deduction is allowed under section 2056 from the
gross estate of a decedent for the value of any property interest which
passes from the decedent to the decedent's surviving spouse if the
interest is a deductible interest as defined in Sec. 20.2056(a)-2. With
respect to decedents dying in certain years, a deduction is allowed
under section 2056 only to the extent that the total of the deductible
interests does not exceed the applicable limitations set forth in
paragraph (c) of this section. The deduction allowed under section 2056
is referred to as the marital deduction. See also sections 2056(d) and
2056A for special rules applicable in the case of decedents dying after
November 10, 1988, if the decedent's surviving spouse is not a citizen
of the United States at the time of the decedent's death. In such
cases, the marital deduction may not be allowed unless the property
passes to a qualified domestic trust as described in section 2056A(a).
(b) Requirements for marital deduction--(1) In general. To obtain
the marital deduction with respect to any property interest, the
executor must establish the following facts--
(i) The decedent was survived by a spouse (see Sec. 20.2056(c)-
2(e));
(ii) The property interest passed from the decedent to the spouse
(see Secs. 20.2056(b)-5 through 20.2056(b)-8 and 20.2056(c)-1 through
20.2056(c)-3);
(iii) The property interest is a deductible interest (see
Sec. 20.2056(a)-2); and
(iv) The value of the property interest (see Sec. 20.2056(b)-4).
(2) Burden of establishing requisite facts. The executor must
provide the facts relating to any applicable limitation on the amount
of the allowable marital deduction under Sec. 20.2056(a)-1(c), and must
submit proof necessary to establish any fact required under paragraph
(b)(1), including any evidence requested by the district director.
(c) Marital deduction; limitation on aggregate deductions--(1)
Estates of decedents dying before 1977. In the case of estates of
decedents dying before January 1, 1977, the marital deduction is
limited to one-half of the value of the adjusted gross estate, as that
term was defined under section 2056(c)(2) prior to repeal by the
Economic Recovery Tax Act of 1981.
(2) Estates of decedents dying after December 31, 1976, and before
January 1, 1982--Except as provided in Sec. 2002(d)(1) of the Tax
Reform Act of 1976 (Pub. L. 94-455), in the case of decedents dying
after December 31, 1976, and before January 1, 1982, the marital
deduction is limited to the greater of--
(i) $250,000; or
(ii) One-half of the value of the decedent's adjusted gross estate,
adjusted for intervivos gifts to the spouse as prescribed by section
2056(c)(1)(B) prior to repeal by the Economic Recovery Tax Act of 1981
(Pub. L. 97-34).
(3) Estates of decedents dying after December 31, 1981. In the case
of estates of decedents dying after December 31, 1981, the marital
deduction is limited as prescribed in paragraph (c)(2) of this section
if the provisions of Sec. 403(e)(3) of Pub. L. 97-34 are satisfied.
Par. 10. Section 20.2056(a)-2 is amended as follows:
a. In paragraph (a), a paragraph heading is added and the last
sentence is revised.
b. In paragraph (b), a paragraph heading is added.
c. The additions and revisions read as follows:
Sec. 20.2056(a)-2 Marital deduction; deductible interests and
nondeductible interests.
(a) In general. * * * Subject to any applicable limitations set
forth in Sec. 20.2056(a)-1(c), the amount of the marital deduction is
the aggregate value of the deductible interests.
(b) Deductible interests. * * *
* * * * *
Par. 11. Section 20.2056(b)-1 is amended as follows:
a. Paragraphs (d)(2) and (d)(3) are revised.
b. Paragraphs (d)(4) and (d)(5) are added.
c. Paragraph (e)(4) is revised.
d. In paragraph (g), the introductory text is revised.
e. The revisions and additions read as follows:
Sec. 20.2056(b)-1 Marital deduction; limitation in case of life estate
or other terminable interest.
* * * * *
(d) * * *
(2) It is a right to income for life with a general power of
appointment, meeting the requirements set forth in Sec. 20.2056(b)-5;
(3) It consists of life insurance or annuity payments held by the
insurer with a general power of appointment in the spouse, meeting the
requirements set forth in Sec. 20.2056(b)-6;
(4) It is qualified terminable interest property, meeting the
requirements set forth in Sec. 20.2056(b)-7; or
(5) It is an interest in a qualified charitable remainder trust in
which the spouse is the only noncharitable beneficiary, meeting the
requirements set forth in Sec. 20.2056(b)-8.
(e) * * *
(4) The terms passed from the decedent, passed from the decedent to
his surviving spouse and passed from the decedent to a person other
than his surviving spouse are defined in Secs. 20.2056(c)-1 through
20.2056(c)-3.
* * * * *
(g) Examples. The application of this section may be illustrated by
the following examples. In each example, it is assumed that the
executor made no election under section 2056(b)(7) (even if under the
specific facts the election would have been available), that any
property interest passing from the decedent to a person other than the
surviving spouse passed for less than full and adequate consideration
in money or money's worth, and that section 2056(b)(8) is inapplicable.
* * * * *
Par. 12. In Sec. 20.2056(b)-2, headings are added to paragraphs (a)
through (d) to read as follows:
Sec. 20.2056(b)-2 Marital deduction; interest in unidentified assets.
(a) In general. * * *
(b) Application of section 2056(b)(2). * * *
* * * * *
(c) Interest nondeductible if circumstances present. * * *
(d) Example. * * *
* * * * *
Sec. 20.2056(b)-4 [Amended]
Par. 13. In Sec. 20.2056(b)-4, paragraph (b) is amended by removing
the fifth sentence.
Par. 14. Section 20.2056(b)-5 is amended as follows:
a. Paragraph (c) is revised to read as set forth below.
b. The heading and first sentence of paragraph (d) are revised to
read as set forth below.
Sec. 20.2056(b)-5 Marital deduction; life estate with power of
appointment in surviving spouse.
* * * * *
(c) Meaning of specific portion--(1) In general. Except as provided
in paragraphs (c)(2) and (c)(3) of this section, a partial interest in
property is not treated as a specific portion of the entire interest.
In addition, any specific portion of an entire interest in property is
nondeductible to the extent the specific portion is subject to invasion
for the benefit of any person other than the surviving spouse, except
in the case of a deduction allowable under section 2056(b)(5), relating
to the exercise of a general power of appointment by the surviving
spouse.
(2) Fraction or percentage share. Under section 2056(b)(10), a
partial interest in property is treated as a specific portion of the
entire interest if the rights of the surviving spouse in income, and
the required rights as to the power described in Sec. 20.2056(b)-5(a),
constitute a fractional or percentage share of the entire property
interest, so that the surviving spouse's interest reflects its
proportionate share of the increase or decrease in the value of the
entire property interest to which the income rights and the power
relate. Thus, if the spouse's right to income and the spouse's power
extend to a specified fraction or percentage of the property, or the
equivalent, the interest is in a specific portion of the property. In
accordance with paragraph (b) of this section, if the spouse has the
right to receive the income from a specific portion of the trust
property (after applying paragraph (c)(3) of this section) but has a
power of appointment over a different specific portion of the property
(after applying paragraph (c)(3) of this section), the marital
deduction is limited to the lesser specific portion.
(3) Special rule in the case of estates of decedents dying on or
before October 24, 1992, and certain decedents dying after October 24,
1992, with wills or revocable trusts executed on or prior to that date.
(i) In the case of estates of decedents within the purview of the
effective date and transitional rules contained in paragraphs (c)(3)
(ii) and (iii) of this section:
(A) A specific sum payable annually, or at more frequent intervals,
out of the property and its income that is not limited by the income of
the property is treated as the right to receive the income from a
specific portion of the property. The specific portion, for purposes of
paragraph (c)(2) of this section, is the portion of the property that,
assuming the interest rate generally applicable for the valuation of
annuities at the time of the decedent's death, would produce income
equal to such payments. However, a pecuniary amount payable annually to
a surviving spouse is not treated as a right to the income from a
specific portion of the trust property for purposes of this paragraph
(c)(3)(i)(A) if any person other than the surviving spouse may receive,
during the surviving spouse's lifetime, any distribution of the
property. To determine the applicable interest rate for valuing
annuities, see sections 2031 and 7520 and the regulations under those
sections.
(B) The right to appoint a pecuniary amount out of a larger fund
(or trust corpus) is considered the right to appoint a specific portion
of such fund or trust for purposes of paragraph (c)(2) in an amount
equal to such pecuniary amount.
(ii) The rules contained in paragraphs (c)(3)(i) (A) and (B) of
this section apply with respect to estates of decedents dying on or
before October 24, 1992.
(iii) The rules contained in paragraphs (c)(3)(i) (A) and (B) of
this section apply in the case of decedents dying after October 24,
1992, if property passes to the spouse pursuant to a will or revocable
trust agreement executed on or before October 24, 1992, and either--
(A) On that date, the decedent was under a mental disability to
change the disposition of the property and did not regain competence to
dispose of such property before the date of death; or
(B) The decedent dies prior to October 24, 1995.
(iv) Notwithstanding paragraph (c)(3)(iii) of this section,
paragraphs (c)(3)(i) (A) and (B) of this section do not apply if the
will or revocable trust is amended after October 24, 1992, in any
respect that increases the amount of the transfer qualifying for the
marital deduction or alters the terms by which the interest so passes
to the surviving spouse of the decedent.
(4) Local law. A partial interest in property is treated as a
specific portion of the entire interest if it is shown that the
surviving spouse has rights under local law that are identical to those
the surviving spouse would have acquired had the partial interest been
expressed in terms satisfying the requirements of paragraph (c)(2) (or
paragraph (c)(3) if applicable) of this section.
(5) Examples. The following examples illustrate the application of
paragraphs (a) through (c)(4) of this section:
Example 1. Spouse entitled to the lesser of an annuity or a
fraction of trust income. The decedent, D, died prior to October 24,
1992. D bequeathed in trust 500 identical shares of X company stock,
valued for estate tax purposes at $500,000. The trust provides that
during the lifetime of D's spouse, S, the trustee is to pay annually
to S the lesser of one-half of the trust income or $20,000. Any
trust income not paid to S is to be accumulated in the trust and may
not be distributed during S's lifetime. S has a testamentary general
power of appointment over the entire trust principal. The applicable
interest rate for valuing annuities as of D's date of death under
section 7520 is 10 percent. For purposes of paragraphs (a) through
(c) of this section, S is treated as receiving all of the income
from the lesser of--
(i) One half of the stock ($250,000); or
(ii) $200,000, the specific portion of the stock which, as
determined in accordance with Sec. 20.2056(b)-5(c)(3)(i)(A), would
produce annual income of $20,000 (20,000/.10). Accordingly, the
marital deduction is limited to $200,000 (200,000/500,000 or \2/5\
of the value of the trust).
Example 2. Spouse possesses power and income interest over
different specific portions of trust. The facts are the same as in
Example 1 except that S's testamentary general power of appointment
is exercisable over only \1/4\ of the trust principal. Consequently,
under section 2056(b)(5), the marital deduction is allowable only
for the value of \1/4\ of the trust ($125,000); i.e., the lesser of
the value of the portion with respect to which S is deemed to be
entitled to all of the income (\2/5\ of the trust or $200,000), or
the value of the portion with respect to which S possesses the
requisite power of appointment (\1/4\ of the trust or $125,000).
Example 3. Power of appointment over pecuniary amount. The
decedent, D, died prior to October 24, 1992. D bequeathed property
valued at $400,000 for estate tax purposes in trust. The trustee is
to pay annually to D's spouse, S, one-fourth of the trust income.
Any trust income not paid to S is to be accumulated in the trust and
may not be distributed during S's lifetime. The will gives S a
testamentary general power of appointment over the sum of $160,000.
Because D died prior to October 24, 1992, S's power of appointment
over $160,000 is treated as a power of appointment over a specific
portion of the entire trust interest. The marital deduction
allowable under section 2056(b)(5) is limited to $100,000; that is,
the lesser of--
(1) The value of the trust corpus ($400,000);
(2) The value of the trust corpus over which S has a power of
appointment ($160,000); or
(3) That specific portion of the trust with respect to which S
is entitled to all the income ($100,000).
Example 4. Power of appointment over shares of stock constitutes
a power over a specific portion. Under D's will, 250 shares of Y
company stock were bequeathed in trust pursuant to which all trust
income was payable annually to S, D's spouse, for life. S was given
a testamentary general power of appointment over 100 shares of
stock. The trust provides that if the trustee sells the Y company
stock, S's general power of appointment is exercisable with respect
to the sale proceeds or the property in which the proceeds are
reinvested. Because the amount of property represented by a single
share of stock would be altered if the corporation split its stock,
issued stock dividends, made a distribution of capital, etc., a
power to appoint 100 shares at the time of S's death is not
necessarily a power to appoint the entire interest that the 100
shares represented on the date of D's death. If it is shown that,
under local law, S has a general power to appoint not only the 100
shares designated by D but also 100/250 of any distributions by the
corporation that are included in trust principal, the requirements
of paragraph (c)(2) of this section are satisfied and S is treated
as having a general power to appoint 100/250 of the entire interest
in the 250 shares. In that case, the marital deduction is limited to
40 percent of the trust principal. If local law does not give S that
power, the 100 shares would not constitute a specific portion under
Sec. 20.2056(b)-5(c) (including Sec. 20.2056(b)-5(c)(3)(i)(B)). The
nature of the asset is such that a change in the capitalization of
the corporation could cause an alteration in the original value
represented by the shares at the time of D's death and, thus, it
does not represent a specific portion of the trust.
(d) Meaning of entire interest. Because a marital deduction is
allowed for each separate qualifying interest in property passing from
the decedent to the decedent's surviving spouse (subject to any
applicable limitations in Sec. 20.2056(a)-l(c)), for purposes of
paragraphs (a) and (b) of this section, each property interest with
respect to which the surviving spouse received any rights is considered
separately in determining whether the surviving spouse's rights extend
to the entire interest or to a specific portion of the entire interest.
* * *
* * * * *
Par. 15. Sections 20.2056(b)-7 through 20.2056(b)-10 are added to
read as follows:
Sec. 20.2056(b)-7 Election with respect to life estate for surviving
spouse.
(a) In general. Subject to section 2056(d), a marital deduction is
allowed under section 2056(b)(7) with respect to estates of decedents
dying after December 31, 1981, for qualified terminable interest
property as defined in paragraph (b) of this section. All of the
property for which a deduction is allowed under this paragraph (a) is
treated as passing to the surviving spouse (for purposes of
Sec. 20.2056(a)-1), and no part of the property is treated as passing
to any person other than the surviving spouse (for purposes of
Sec. 20.2056(b)-1).
(b) Qualified terminable interest property--(1) In general. Section
2056(b)(7)(B)(i) provides the definition of qualified terminable
interest property.
(i) Terminable interests described in section 2056(b)(1)(C) cannot
qualify as qualified terminable interest property. Thus, if the
decedent directs the executor to purchase a terminable interest with
estate assets, the terminable interest acquired will not qualify as
qualified terminable interest property.
(ii) For purposes of section 2056(b)(7)(B)(i), the term property
generally means the entire interest in property (within the meaning of
Sec. 20.2056(b)-5(d)) or a specific portion of the entire interest
(within the meaning of Sec. 20.2056(b)-5(c)).
(2) Property for which an election may be made--(i) In general. The
election may relate to all or any part of property that meets the
requirements of section 2056(b)(7)(B)(i), provided that any partial
election must be made with respect to a fractional or percentage share
of the property so that the elective portion reflects its proportionate
share of the increase or decrease in value of the entire property for
purposes of applying sections 2044 or 2519. The fraction or percentage
may be defined by formula.
(ii) Division of trusts--(A) In general. A trust may be divided
into separate trusts to reflect a partial election that has been made,
or is to be made, if authorized under the governing instrument or
otherwise permissible under local law. Any such division must be
accomplished no later than the end of the period of estate
administration. If, at the time of the filing of the estate tax return,
the trust has not yet been divided, the intent to divide the trust must
be unequivocally signified on the estate tax return.
(B) Manner of dividing and funding trust. The division of the trust
must be done on a fractional or percentage basis to reflect the partial
election. However, the separate trusts do not have to be funded with a
pro rata portion of each asset held by the undivided trust.
(C) Local law. A trust may be divided only if the fiduciary is
required, either by applicable local law or by the express or implied
provisions of the governing instrument, to divide the trust on the
basis of the fair market value of the assets of the trust at the time
of the division.
(3) Persons permitted to make the election. The election referred
to in section 2056(b)(7)(B)(i)(III) must be made by the executor that
is appointed, qualified, and acting within the United States, within
the meaning of section 2203, regardless of whether the property with
respect to which the election is to be made is in the executor's
possession. If there is no executor appointed, qualified, and acting
within the United States, the election may be made by any person with
respect to property in the actual or constructive possession of that
person and may also be made by that person with respect to other
property not in the actual or constructive possession of that person if
the person in actual or constructive possession of such other property
does not make the election. For example, in the absence of an appointed
executor, the trustee of an intervivos trust (that is included in the
gross estate of the decedent) can make the election.
(4) Manner and time of making the election--(i) In general. The
election referred to in section 2056(b)(7)(B)(i)(III) and (v) is made
on the return of tax imposed by section 2001 (or section 2101). For
purposes of this paragraph, the term return of tax imposed by section
2001 means the last estate tax return filed by the executor on or
before the due date of the return, including extensions or, if a timely
return is not filed, the first estate tax return filed by the executor
after the due date.
(ii) Election irrevocable. The election, once made, is irrevocable,
provided that an election may be revoked or modified on a subsequent
return filed on or before the due date of the return, including
extensions actually granted. If an executor appointed under local law
has made an election on the return of tax imposed by section 2001 (or
section 2101) with respect to one or more properties, no subsequent
election may be made with respect to other properties included in the
gross estate after the return of tax imposed by section 2001 is filed.
An election under section 2056(b)(7)(B)(v) is separate from any
elections made under section 2056A(a)(3).
(c) Protective elections--(1) In general. A protective election may
be made to treat property as qualified terminable interest property
only if, at the time the federal estate tax return is filed, the
executor of the decedent's estate reasonably believes that there is a
bona fide issue that concerns whether an asset is includible in the
decedent's gross estate, or the amount or nature of the property the
surviving spouse is entitled to receive, i.e., whether property that is
includible is eligible for the qualified terminable interest property
election. The protective election must identify either the specific
asset, group of assets, or trust to which the election applies and the
specific basis for the protective election.
(2) Protective election irrevocable. The protective election, once
made on the return of tax imposed by section 2001, cannot be revoked.
For example, if a protective election is made on the basis that a bona
fide question exists regarding the inclusion of a trust corpus in the
gross estate and it is later determined that the trust corpus is so
includible, the protective election becomes effective with respect to
the trust corpus and cannot thereafter be revoked.
(d) Qualifying income interest for life--(1) In general. Section
2056(b)(7)(B)(ii) provides the definition of qualifying income interest
for life. For purposes of section 2056(b)(7)(B)(ii)(II), the surviving
spouse is included within the prohibited class of powerholders referred
to therein.
(2) Entitled for life to all income. The principles of
Sec. 20.2056(b)-5(f), relating to whether the spouse is entitled for
life to all of the income from the entire interest, or a specific
portion of the entire interest, apply in determining whether the
surviving spouse is entitled for life to all of the income from the
property regardless of whether the interest passing to the spouse is in
trust.
(3) Contingent income interests. An income interest granted for a
term of years, or a life estate subject to termination upon the
occurrence of a specified event (e.g., remarriage), is not a qualifying
income interest for life. In addition, an income interest (or life
estate) that is contingent upon the executor's election under section
2056(b)(7)(B)(v) is not a qualifying income interest for life,
regardless of whether the election is actually made.
(4) Income between last distribution date and date of spouse's
death. An income interest does not fail to constitute a qualifying
income interest for life solely because income between the last
distribution date and the date of the surviving spouse's death is not
required to be distributed to the surviving spouse or to the estate of
the surviving spouse. See Sec. 20.2044-1 relating to the inclusion of
such undistributed income in the gross estate of the surviving spouse.
(5) Pooled income funds. An income interest in a pooled income fund
described in section 642(c)(5) constitutes a qualifying income interest
for life for purposes of section 2056(b)(7)(B)(ii).
(6) Power to distribute principal to spouse. An income interest in
a trust will not fail to constitute a qualifying income interest for
life solely because the trustee has a power to distribute principal to
or for the benefit of the surviving spouse. The fact that property
distributed to a surviving spouse may be transferred by the spouse to
another person does not result in a failure to satisfy the requirement
of section 2056(b)(7)(B)(ii)(II). However, if the surviving spouse is
legally bound to transfer the distributed property to another person
without full and adequate consideration in money or money's worth, the
requirement of section 2056(b)(7)(B)(ii)(II) is not satisfied.
(e) Annuities payable from trusts in the case of estates of
decedents dying on or before October 24, 1992, and certain decedents
dying after October 24, 1992, with wills or revocable trusts executed
on or prior to that date--(1) In general. In the case of estates of
decedents within the purview of the effective date and transitional
rules contained in Sec. 20.2056(b)-7(e)(5), a surviving spouse's
lifetime annuity interest payable from a trust or other group of assets
passing from the decedent is treated as a qualifying income interest
for life for purposes of section 2056(b)(7)(B)(ii).
(2) Deductible interest. The deductible interest, for purposes of
Sec. 20.2056(a)-2(b), is the specific portion of the property that,
assuming the applicable interest rate for valuing annuities, would
produce income equal to the minimum amount payable annually to the
surviving spouse. If, based on the applicable interest rate, the entire
property from which the annuity may be satisfied is insufficient to
produce income equal to the minimum annual payment, the value of the
deductible interest is the entire value of the property. The value of
the deductible interest may not exceed the value of the property from
which the annuity is payable. If the annual payment may increase, the
increased amount is not taken into account in valuing the deductible
interest.
(3) Distributions permissible only to surviving spouse. An annuity
interest is not treated as a qualifying income interest for life for
purposes of section 2056(b)(7)(B)(ii) if any person other than the
surviving spouse may receive, during the surviving spouse's lifetime,
any distribution of the property or its income (including any
distribution under an annuity contract) from which the annuity is
payable.
(4) Applicable interest rate. To determine the applicable interest
rate for valuing annuities, see sections 2031 and 7520 and the
regulations under those sections.
(5) Effective dates. (i) The rules contained in Sec. 20.2056(b)-
7(e) apply with respect to estates of decedents dying on or before
October 24, 1992.
(ii) The rules contained in Sec. 20.2056(b)-7(e) apply in the case
of decedents dying after October 24, 1992, if property passes to the
spouse pursuant to a will or revocable trust executed on or before
October 24, 1992, and either--
(A) On that date, the decedent was under a mental disability to
change the disposition of his property and did not regain his
competence to dispose of such property before the date of death; or
(B) The decedent dies prior to October 24, 1995.
(iii) Notwithstanding the foregoing, the rules contained in
Sec. 20.2056(b)-7(e) do not apply if the will or revocable trust is
amended after October 24, 1992, in any respect that increases the
amount of the transfer qualifying for the marital deduction or alters
the terms by which the interest so passes to the surviving spouse.
(f) Joint and survivor annuities. [Reserved]
(g) Application of local law. The provisions of local law are taken
into account in determining whether the conditions of section
2056(b)(7)(B)(ii)(I) are satisfied. For example, silence of a trust
instrument as to the frequency of payment is not regarded as a failure
to satisfy the requirement that the income must be payable to the
surviving spouse annually or more frequently unless applicable local
law permits payments less frequently.
(h) Examples. The following examples illustrate the application of
paragraphs (a) through (g) of this section. In each example, it is
assumed that the decedent, D, was survived by S, D's spouse and that,
unless stated otherwise, S is not the trustee of any trust established
for S's benefit.
Example 1. Life estate in residence. D owned a personal
residence valued at $250,000 for estate tax purposes. Under D's
will, the exclusive and unrestricted right to use the residence
(including the right to continue to occupy the property as a
personal residence or to rent the property and receive the income)
passes to S for life. At S's death, the property passes to D's
children. Under applicable local law, S must consent to any sale of
the property. If the executor elects to treat all of the personal
residence as qualified terminable interest property, the deductible
interest is $250,000, the value of the residence for estate tax
purposes.
Example 2. Power to make property productive. D's will
established a trust funded with property valued for estate tax
purposes at $500,000. The assets include both income producing
assets and non-productive assets. S was given the power, exercisable
annually, to require distribution of all of the trust income to
herself. No trust property may be distributed during S's lifetime to
any person other than S. Applicable local law permits S to require
that the trustee either make the trust property productive or sell
the property and reinvest in productive property within a reasonable
time after D's death. If the executor elects to treat all of the
trust as qualified terminable interest property, the deductible
interest is $500,000. If the executor elects to treat only 20
percent of the trust as qualified terminable interest property, the
deductible interest is $100,000, i.e., 20 percent of $500,000.
Example 3. Power of distribution over fraction of trust income.
The facts are the same as in Example 2 except that S is given the
right exercisable annually for S's lifetime to require distribution
to herself of only 50 percent of the trust income for life. The
remaining trust income is to be accumulated or distributed among S
and the decedent's children in the trustee's discretion. The maximum
amount that D's executor may elect to treat as qualified terminable
interest property is $250,000; i.e., the estate tax value of the
trust ($500,000) multiplied by the percentage of the trust in which
S has a qualifying income interest for life (50 percent). If D's
executor elects to treat only 20 percent of the portion of the trust
in which S has a qualifying income interest as qualified terminable
interest property, the deductible interest is $50,000, i.e., 20
percent of $250,000.
Example 4. Power to distribute trust corpus to other
beneficiaries. D's will established a trust providing that S is
entitled to receive at least annually all the trust income. The
trustee is given the power to use annually during S's lifetime
$5,000 from the trust for the maintenance and support of S's minor
child, C. Any such distribution does not necessarily relieve S of
S's obligation to support and maintain C. S does not have a
qualifying income interest for life in any portion of the trust
because the bequest fails to satisfy the condition that no person
have a power, other than a power the exercise of which takes effect
only at or after S's death, to appoint any part of the property to
any person other than S. The trust would also be nondeductible under
section 2056(b)(7) if S, rather than the trustee, held the power to
appoint a portion of the principal to C. However, in the latter
case, if S made a qualified disclaimer (within the meaning of
section 2518) of the power to appoint to C, the trust could qualify
for the marital deduction pursuant to section 2056(b)(7), assuming
that the power is personal to S and S's disclaimer terminates the
power. Similarly, in either case, if C made a qualified disclaimer
of C's right to receive distributions from the trust, the trust
would qualify under section 2056(b)(7), assuming that C's disclaimer
effectively negates the trustee's power under local law.
Example 5. Spouse's income interest terminable on remarriage.
D's will established a trust providing that all of the trust income
is payable at least annually to S for S's lifetime, provided that,
if S remarries, S's interest in the trust will pass to X. The trust
is not deductible under section 2056(b)(7). S's income interest is
not a qualifying income interest for life because it is not for life
but, rather, is terminable upon S's remarriage.
Example 6. Spouse's income interest contingent on executor's
election. D's will established a trust providing that S is entitled
to receive the income from that portion of the trust that the
executor elects to treat as qualified terminable interest property.
S does not have a qualifying income interest for life in any portion
of the trust because the income interest is contingent upon the
executor's election. Accordingly, the executor cannot elect
qualified terminable interest treatment for any portion of the
trust. If the decedent's will gives the surviving spouse a
qualifying income interest for life in a specific portion of the
trust (such as the minimum portion of the trust that is necessary to
reduce the Federal estate tax to zero) and the interest is not
contingent on the executor's election, the executor can elect
qualified terminable interest treatment for the specified portion of
the trust.
Example 7. Formula partial election. D's will established a
trust funded with the residue of D's estate. Trust income is to be
paid annually to S for life, and the principal is to be distributed
to D's children upon S's death. S has the power to require that all
the trust property be made productive. There is no power to
distribute trust property during S's lifetime to any person other
than S. D's executor elects to deduct a fractional share of the
residuary estate under section 2056(b)(7). The election specifies
that the numerator of the fraction is the amount of deduction
necessary to reduce the Federal estate tax to zero (taking into
account final estate tax values) and the denominator of the fraction
is the final estate tax value of the residuary estate (taking into
account any specific bequests or liabilities of the estate paid out
of the residuary estate). The formula election is of a fractional
share. The value of the share qualifies for the marital deduction
even though the executor's determinations to claim administration
expenses as estate or income tax deductions and the final estate tax
values will affect the size of the fractional share.
Example 8. Formula partial election. The facts are the same as
in Example 7 except that, rather than defining a fraction, the
executor's formula states: ``I elect to treat as qualified
terminable interest property that portion of the residuary trust, up
to 100 percent, necessary to reduce the Federal estate tax to zero,
after taking into account the available unified credit, final estate
tax values and any liabilities and specific bequests paid from the
residuary estate.'' The formula election is of a fractional share.
The share is equivalent to the fractional share determined in
Example 7.
Example 9. Severance of QTIP trust. D's will established a trust
funded with the residue of D's estate. Trust income is to be paid
annually to S for life, and the principal is to be distributed to
D's children upon S's death. S has the power to require that all of
the trust property be made productive. There is no power to
distribute trust property during S's lifetime to any person other
than S. D's will authorizes the executor to make the election under
section 2056(b)(7) only with respect to the minimum amount of
property necessary to reduce estate taxes on D's estate to zero,
authorizes the executor to divide the residuary estate into two
separate trusts to reflect the election, and authorizes the executor
to charge any payment of principal to S to the qualified terminable
interest trust. S is the sole beneficiary of both trusts during S's
lifetime. The authorizations in the will do not adversely affect the
allowance of the marital deduction. Only the property remaining in
the marital deduction trust, after payment of principal to S, is
subject to inclusion in S's gross estate under section 2044 or
subject to gift tax under section 2519.
Example 10. Payments to spouse from individual retirement
account. S is the life beneficiary of sixteen remaining annual
installments payable from D's individual retirement account. The
terms of the account provide for the payment of the account balance
in nineteen annual installments that commenced when D reached age
70\1/2\. Each installment is equal to all the income earned on the
remaining principal in the account plus a share of the remaining
principal equal to \1/19\ in the first year, \1/18\ in the second
year, \1/17\ in the third year, etc. Under the terms of the account,
S has no right to withdraw any other amounts from the account. Any
payments remaining after S's death pass to D's children. S's
interest in the account qualifies as a qualifying income interest
for life under section 2056(b)(7)(B)(ii), without regard to the
provisions of section 2056(b)(7)(C).
Example 11. Spouse's interest in trust in the form of an
annuity. D died prior to October 24, 1992. D's will established a
trust funded with income producing property valued at $500,000 for
estate tax purposes. The trustee is required by the trust instrument
to pay $20,000 a year to S for life. Trust income in excess of the
annuity amount is to be accumulated in the trust and may not be
distributed during S's lifetime. S's lifetime annuity interest is
treated as a qualifying income interest for life. If the executor
elects to treat the entire portion of the trust in which S has a
qualifying income interest as qualified terminable interest
property, the value of the deductible interest is (assuming that 10
percent is the applicable interest rate under section 7520 for
valuing annuities on the appropriate valuation date) $200,000,
because that amount would yield an income to S of $20,000 a year.
Example 12. Value of spouse's annuity exceeds value of trust
corpus. The facts are the same as in Example 11 except that the
trustee is required to pay S $70,000 a year for life. If the
executor elects to treat the entire portion of the trust in which S
has a qualifying income interest as qualified terminable interest
property, the value of the deductible interest is $500,000, which is
the lesser of the entire value of the property ($500,000), or the
amount of property that (assuming a 10 percent interest rate) would
yield an income to S of $70,000 a year ($700,000).
Example 13. Pooled income fund. D's will provides for a bequest
of $200,000 to a pooled income fund described in section 642(c)(5),
designating S as the income beneficiary for life. If D's executor
elects to treat the entire $200,000 as qualified terminable interest
property, the deductible interest is $200,000.
Example 14. Funding severed QTIP trusts. D's will established a
trust satisfying the requirements of section 2056(b)(7). Pursuant to
the authority in D's will and Sec. 20.2056(b)-7(b)(2)(ii), D's
executor indicates on the Federal estate tax return that an election
under section 2056(b)(7) is being made with respect to 50 percent of
the trust, and that the trust will subsequently be divided to
reflect the partial election on the basis of the fair market value
of the property at the time of the division. D's executor funds the
trust at the end of the period of estate administration. At that
time, the property available to fund the trusts consists of 100
shares of X Corporation stock with a current value of $400,000 and
200 shares of Y Corporation stock with a current value of $400,000.
D may fund each trust with the stock of either or both corporations,
in any combination, provided that the aggregate value of the stock
allocated to each trust is $400,000.
Sec. 20.2056(b)-8 Special rule for charitable remainder trusts.
(a) In general--(1) Surviving spouse only noncharitable
beneficiary. With respect to estates of decedents dying after December
31, 1981, subject to section 2056(d), if the surviving spouse of the
decedent is the only noncharitable beneficiary of a charitable
remainder annuity trust or a charitable remainder unitrust described in
section 664 (qualified charitable remainder trust), section 2056(b)(1)
does not apply to the interest in the trust that is transferred to the
surviving spouse. Thus, the value of the annuity or unitrust interest
passing to the spouse qualifies for a marital deduction under section
2056(b)(8) and the value of the remainder interest qualifies for a
charitable deduction under section 2055. If an interest in property
qualifies for a marital deduction under section 2056(b)(8), no election
may be made with respect to the property under section 2056(b)(7). For
purposes of this section, the term non-charitable beneficiary means any
beneficiary of the qualified charitable remainder trust other than an
organization described in section 170(c).
(2) Interest for life or term of years. The surviving spouse's
interest need not be an interest for life to qualify for a marital
deduction under section 2056(b)(8). However, for purposes of section
664, an annuity or unitrust interest payable to the spouse for a term
of years cannot be payable for a term that exceeds 20 years.
(3) Payment of state death taxes. A deduction is allowed under
section 2056(b)(8) even if the transfer to the surviving spouse is
conditioned on the spouse's payment of state death taxes, if any,
attributable to the qualified charitable remainder trust. See
Sec. 20.2056(b)-4(c) for the effect of such a condition on the amount
of the deduction allowable.
(b) Charitable remainder trusts where the surviving spouse is not
the only noncharitable beneficiary. In the case of a charitable
remainder trust where the decedent's spouse is not the only
noncharitable beneficiary (for example, where the noncharitable
interest is payable to the decedent's spouse for life and then to
another individual for life), the qualification of the interest as
qualified terminable interest property is determined solely under
section 2056(b)(7) and not under section 2056(b)(8). Accordingly, if
the decedent died on or before October 24, 1992, or the trust otherwise
comes within the purview of the transitional rules contained in
Sec. 20.2056(b)-7(e)(5), the spousal annuity or unitrust interest may
qualify under Sec. 20.2056(b)-(7)(e) as a qualifying income interest
for life.
Sec. 20.2056(b)-9 Denial of double deduction.
The value of an interest in property may not be deducted for
Federal estate tax purposes more than once with respect to the same
decedent. For example, where a decedent transfers a life estate in a
farm to the spouse with a remainder to charity, the entire property is,
pursuant to the executor's election under section 2056(b)(7), treated
as passing to the spouse. The entire value of the property qualifies
for the marital deduction. No part of the value of the property
qualifies for a charitable deduction under section 2055 in the
decedent's estate.
Sec. 20.2056(b)-10 Effective dates.
Except as specifically provided in Secs. 20.2056(b)-5(c)(3) (ii)
and (iii), 20.2056(b)-7(e)(5), and 20.2056(b)-8(b), the provisions of
Secs. 20.2056(b)-5(c), 20.2056(b)-7, 20.2056(b)-8, and 20.2056(b)-9 are
effective with respect to estates of decedents dying after March 1,
1994. With respect to estates of decedents dying on or before such
date, the executor of the decedent's estate may rely on any reasonable
interpretation of the statutory provisions. For these purposes, the
provisions of Secs. 20.2056(b)-5(c), 20.2056(b)-7, 20.2056(b)-8, and
20.2056(b)-9 (as well as project LR-211-76, 1984-1 C.B., page 598, see
Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a reasonable
interpretation of the statutory provisions.
Secs. 20.2056(c)-1 and 20.2056(c)-2 [Removed]
Par. 16. Sections 20.2056(c)-1 and 20.2056(c)-2 are removed.
Par. 17. Section 20.2056(e)-1 is redesignated Sec. 20.2056(c)-1 and
amended as follows:
a. The section heading is revised as set forth below.
b. Headings are added for paragraphs (a) and (b) as set forth
below.
c. The last sentence in paragraph (b) is removed.
Sec. 20.2056(c)-1 Marital deduction; definition of passed from the
decedent.
(a) In general. * * *
(b) Expectant interest in property under community property laws. *
* *
Par. 18. Section 20.2056(e)-2 is redesignated Sec. 20.2056(c)-2,
and amended as follows:
a. The section heading is revised.
b. The first sentence of paragraph (a) is amended by removing the
reference ``Sec. 20.2056(e)-l'' and adding ``Sec. 20.2056(c)-1'' in its
place.
c. Paragraphs (a)(2) through (a)(5) are redesignated as paragraphs
(a)(3) through (a)(6), respectively, and a new paragraph (a)(2) is
added.
d. The first sentence in the concluding text of paragraph (a)
following newly designated paragraph (a)(6) is revised.
e. Paragraphs (b)(1)(iv) and (b)(2)(iii) are amended by removing
the reference ``Sec. 20.2056(b)-5'' and adding ``Sec. 20.2056(b)-5 or
20.2056(b)-7'' in its place.
f. Paragraph (b)(3)(v) is amended by removing the reference
``section 2056(b)(5)'' and adding ``Sec. 20.2056(b)-5 or 20.2056(b)-7''
in its place.
g. The revisions and additions read as follows:
Sec. 20.2056(c)-2 Marital deduction; definition of passed from the
decedent to his surviving spouse.
(a) * * *
(2) In the case of certain interests with income for life to the
surviving spouse that the executor elects to treat as qualified
terminable interest property (see Sec. 20.2056(b)-7);
* * * * *
A property interest is treated as passing to the surviving spouse
only if it passes to the spouse as beneficial owner, except to the
extent otherwise provided in Secs. 20.2056(b)-5 through 20.2056(b)-7. *
* *
* * * * *
Sec. 20.2056(e)-3 [Redesignated as Sec. 20.2056(c)-3 and Amended]
Par. 19. Section 20.2056(e)-3 is redesignated Sec. 20.2056(c)-3,
and amended by removing the references to ``Sec. 20.2056(e)-1'' and
``Sec. 20.2056(e)-2'' and adding ``Sec. 20.2056(c)-1'' and
``Sec. 20.2056(c)-2'' in their respective places in the first sentence.
Par. 20. Sections 20.2207A-1 and 20.2207A-2 are added to read as
follows:
Sec. 20.2207A-1 Right of recovery of estate taxes in the case of
certain marital deduction property.
(a) In general--(1) Right of recovery from person receiving the
property. If the gross estate includes the value of property that is
includible by reason of section 2044 (relating to certain property in
which the decedent had a qualifying income interest for life under
sections 2056(b)(7) or 2523(f)), the estate of the surviving spouse is
entitled to recover from the person receiving the property (as defined
in paragraph (d) of this section) the amount of Federal estate tax
attributable to that property. The right of recovery arises when the
Federal estate tax with respect to the property includible in the gross
estate by reason of section 2044 is paid by the estate. There is no
right of recovery from any person for the property received by that
person for which a deduction was allowed from the gross estate if no
tax is attributable to that property.
(2) Failure to exercise right of recovery. Failure of an estate to
exercise a right of recovery under this section upon a transfer subject
to section 2044 is treated as a transfer for Federal gift tax purposes
of the unrecovered amounts from the persons who would benefit from the
recovery to the persons from whom the recovery could have been
obtained. See Sec. 25.2511-1 of this chapter. The transfer is
considered made when the right of recovery is no longer enforceable
under applicable local law. A delay in the exercise of the right of
recovery may be treated as an interest-free loan with appropriate gift
tax consequences under section 7872 depending on the facts of the
particular case.
(3) Waiver of right of recovery. The provisions of Sec. 20.2207A-
1(a)(2) do not apply to the extent that the surviving spouse's will
provides that a recovery shall not be made or to the extent that the
beneficiaries cannot otherwise compel recovery. Thus, e.g., if the
surviving spouse gives the executor of the estate discretion to waive
the right of recovery and the executor waives the right, no gift occurs
under Sec. 25.2511-1 of this chapter if the persons who would benefit
from the recovery cannot compel the executor to exercise the right of
recovery.
(b) Amount of estate tax attributable to property includible under
section 2044. The amount of Federal estate tax attributable to property
includible in the gross estate under section 2044 is the amount by
which the total Federal estate tax (including penalties and interest
attributable to the tax) under chapter 11 of the Internal Revenue Code
that has been paid, exceeds the total Federal estate tax (including
penalties and interest attributable to the tax) under chapter 11 of the
Internal Revenue Code that would have been paid if the value of the
property includible in the gross estate by reason of section 2044 had
not been so included.
(c) Amount of estate tax attributable to a particular property. An
estate's right of recovery with respect to a particular property is an
amount equal to the amount determined in paragraph (b) of this section
multiplied by a fraction. The numerator of the fraction is the value
for Federal estate tax purposes of the particular property included in
the gross estate by reason of section 2044, less any deduction allowed
with respect to the property. The denominator of the fraction is the
total value of all properties included in the gross estate by reason of
section 2044, less any deductions allowed with respect to those
properties.
(d) Person receiving the property. If the property is in a trust at
the time of the decedent's death, the person receiving the property is
the trustee and any person who has received a distribution of the
property prior to the expiration of the right of recovery if the
property does not remain in trust. This paragraph (d) does not affect
the right, if any, under local law, of any person with an interest in
property to reimbursement or contribution from another person with an
interest in the property.
(e) Example. The following example illustrates the application of
paragraphs (a) through (d) of this section.
Example. D died in 1994. D's will created a trust funded with
certain income producing assets included in D's gross estate at
$1,000,000. The trust provides that all the income is payable to D's
wife, S, for life, remainder to be divided equally among their four
children. In computing D's taxable estate, D's executor deducted,
pursuant to section 2056(b)(7), $1,000,000. Assume that S received
no other property from D and that S died in 1996. Assume further
that S made no section 2519 disposition of the property, that the
property was included in S's gross estate at a value of $1,080,000,
and that S's will contained no provision regarding section 2207A(a).
The tax attributable to the property is equal to the amount by which
the total Federal estate tax (including penalties and interest) paid
by S's estate exceeds the Federal estate tax (including penalties
and interest) that would have been paid if S's gross estate had been
reduced by $1,080,000. That amount of tax may be recovered by S's
estate from the trust. If, at the time S's estate seeks
reimbursement, the trust has been distributed to the four children,
S's estate is also entitled to recover the tax from the children.
Sec. 20.2207A-2 Effective date.
The provisions of Sec. 20.2207A-1 are effective with respect to
estates of decedents dying after March 1, 1994. With respect to estates
of decedent dying on or before such date, the executor of the
decedent's estate may rely on any reasonable interpretation of the
statutory provisions. For these purposes, the provisions of
Sec. 20.2207A-1 (as well as project LR-211-76, 1984-1 C.B., page 598,
see Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a
reasonable interpretation of the statutory provisions.
PART 22--TEMPORARY ESTATE AND GIFT TAX REGULATIONS UNDER THE
ECONOMIC RECOVERY TAX ACT OF 1981
Par. 21. The authority citation for part 22 is revised to read as
folows:
Authority: 26 U.S.C. 7805.
Sec. 22.2056-1 [Removed]
Par. 22. Section 22.2056-1 is removed.
PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954
Par. 23. The authority citation for part 25 is revised to read as
follows:
Authority: 26 U.S.C. 7805.
(Section 25.2512-5 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5))
(Section 25.2512-9 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5))
(Section 25.2513-1 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5))
(Section 25.2522(c)-3 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5))
(Section 25.2522(d)-1 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5))
(Section 25.2523(a)-1 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5))
(Section 25.2523(b)-1 also issued under 26 U.S.C. 170(f)(4) and 26
U.S.C. 642(c)(5))
(Section 25.6091-1 also issued under 26 U.S.C. 6091)
Par. 24. The authority citations immediately following
Secs. 25.2512-5, 25.2512-9, 25.2522(c)-3 and 25.2523(a)-1 are removed.
Par. 25. Sections 25.2207A-1 and 25.2207A-2 are added immediately
following the undesignated center heading ``Determination of Tax
Liability'' to read as follows:
Sec. 25.2207A-1 Right of recovery of gift taxes in the case of certain
marital deduction property.
(a) In general. If an individual is treated as transferring an
interest in property by reason of section 2519, the individual or the
individual's estate is entitled to recover from the person receiving
the property (as defined in paragraph (e) of this section) the amount
of gift tax attributable to that property. The value of property to
which this paragraph (a) applies is the value of all interests in the
property other than the qualifying income interest. There is no right
of recovery from any person for the property received by that person
for which a deduction was allowed from the total amount of gifts, if no
Federal gift tax is attributable to the property. The right of recovery
arises at the time the Federal gift tax is actually paid by the
transferor subject to section 2519.
(b) Failure of a person to exercise the right of recovery.
[Reserved].
(c) Amount of gift tax attributable to all properties. The amount
of Federal gift tax attributable to all properties includible in the
total amount of gifts under section 2519 made during the calendar year
is the amount by which the total Federal gift tax for the calendar year
(including penalties and interest attributable to the tax) under
chapter 12 of the Internal Revenue Code which has been paid, exceeds
the total Federal gift tax for the calendar year (including penalties
and interest attributable to the tax) under chapter 12 of the Internal
Revenue Code which would have been paid if the value of the properties
includible in the total amount of gifts by reason of section 2519 had
not been included.
(d) Amount of gift tax attributable to a particular property. A
person's right of recovery with respect to a particular property is an
amount equal to the amount determined in paragraph (c) of this section
multiplied by a fraction. The numerator of the fraction is the value of
the particular property included in the total amount of gifts made
during the calendar year by reason of section 2519, less any deduction
allowed with respect to the property. The denominator of the fraction
is the total value of all properties included in the total amount of
gifts made during the calendar year by reason of section 2519, less any
deductions allowed with respect to those properties.
(e) Person receiving the property. If the property is in a trust at
the time of the transfer, the person receiving the property is the
trustee, and any person who has received a distribution of the property
prior to the expiration of the right of recovery if the property does
not remain in trust. This paragraph (e) does not affect the right, if
any, under local law, of any person with an interest in property to
reimbursement or contribution from another person with an interest in
the property.
(f) Example. The following example illustrates the application of
paragraphs (a) through (e) of this section.
Example. D created an inter vivos trust during 1994 with certain
income producing assets valued at $1,000,000. The trust provides
that all income is payable to D's wife, S, for S's life, with the
remainder at S's death to be divided equally among their four
children. In computing taxable gifts during calendar year 1994, D
deducted, pursuant to section 2523(f), $1,000,000 from the total
amount of gifts made. In addition, assume that S received no other
transfers from D and that S made a gift during 1996 of the entire
life interest to one of the children, at which time the value of
trust assets was $1,080,000 and the value of S's life interest was
$400,000. Although the entire value of the trust assets ($1,080,000)
is, pursuant to sections 2511 and 2519, included in the total amount
of S's gifts for calendar year 1996, S is only entitled to
reimbursement for the Federal gift tax attributable to the value of
the remainder interest, that is, the Federal gift tax attributable
to $680,000 ($1,080,000 less $400,000). The Federal gift tax
attributable to $680,000 is equal to the amount by which the total
Federal gift tax (including penalties and interest) paid for the
calendar year exceeds the federal gift tax (including penalties and
interest) that would have been paid if the total amount of gifts
during 1996 had been reduced by $680,000. That amount of tax may be
recovered by S from the trust.
Sec. 25.2207A-2 Effective date.
The provisions of Sec. 25.2207A-1 are effective with respect to
dispositions made after March 1, 1994. With respect to gifts made on or
before such date, the donor may rely on any reasonable interpretation
of the statutory provisions. For these purposes, the provisions of
Sec. 25.2207A-1 (as well as project LR-211-76, 1984-1 C.B., page 598,
see Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a
reasonable interpretation of the statutory provisions.
Par. 26. Section 25.2515-1 is amended by:
a. Redesignating paragraph (a) as (a)(3).
b. Adding paragraphs (a)(1) and (2) to read as follows:
Sec. 25.2515-1 Tenancies by the entirety; in general.
(a) Scope--(1) In general. This section and Secs. 25.2515-2 through
25.2515-4 do not apply to the creation of a tenancy by the entirety
after December 31, 1981, and do not reflect changes made to the
Internal Revenue Code by sections 702(k)(1)(A) of the Revenue Act of
1978, or section 2002(c)(2) of the Tax Reform Act of 1976.
(2) Special rule in the case of tenancies created after July 13,
1988, if the donee spouse is not a United States citizen. Under section
2523(i)(3), applicable (subject to the special treaty rule contained in
Public Law 101-239, section 7815(d)(14)) in the case of tenancies by
the entirety and joint tenancies created between spouses after July 13,
1988, if the donee spouse is not a citizen of the United States, the
principles contained in section 2515 and Secs. 25.2515-1 through
25.2515-4 apply in determining the gift tax consequences with respect
to the creation and termination of the tenancy, except that the
election provided in section 2515(a) (prior to repeal by the Economic
Recovery Tax Act of 1981) and Sec. 25.2515-2 (relating to the donor's
election to treat the creation of the tenancy as a transfer for gift
tax purposes) does not apply.
* * * * *
Par. 27. Sections 25.2519-1 and 25.2519-2 are added immediately
after the undesignated center heading ``Deductions'' and before
Sec. 25.2521-1 to read as follows:
Sec. 25.2519-1 Dispositions of certain life estates.
(a) In general. If a donee spouse makes a disposition of all or
part of a qualifying income interest for life in any property for which
a deduction was allowed under section 2056(b)(7) or section 2523(f) for
the transfer creating the qualifying income interest, the donee spouse
is treated for purposes of chapters 11 and 12 of subtitle B of the
Internal Revenue Code as transferring all interests in property other
than the qualifying income interest. For example, if the donee spouse
makes a disposition of part of a qualifying income interest for life in
trust corpus, the spouse is treated under section 2519 as making a
transfer subject to chapters 11 and 12 of the entire trust other than
the qualifying income interest for life. Therefore, the donee spouse is
treated as making a gift under section 2519 of the entire trust less
the qualifying income interest, and is treated for purposes of section
2036 as having transferred the entire trust corpus, including that
portion of the trust corpus from which the retained income interest is
payable. A transfer of all or a portion of the income interest of the
spouse is a transfer by the spouse under section 2511. See also section
2702 for special rules applicable in valuing the gift made by the
spouse under section 2519.
(b) Presumption. Unless the donee spouse establishes to the
contrary, section 2519 applies to the entire trust at the time of the
disposition. If a deduction is taken on either the estate or gift tax
return with respect to the transfer which created the qualifying income
interest, it is presumed that the deduction was allowed for purposes of
section 2519. To avoid the application of section 2519 upon a transfer
of all or part of the donee spouse's income interest, the donee spouse
must establish that a deduction was not taken for the transfer of
property which created the qualifying income interest. For example, to
establish that a deduction was not taken, the donee spouse may produce
a copy of the estate or gift tax return filed with respect to the
transfer creating the qualifying income interest for life establishing
that no deduction was taken under section 2056(b)(7) or section
2523(f). In addition, the donee spouse may establish that no return was
filed on the original transfer by the donor spouse because the value of
the first spouse's gross estate was below the threshold requirement for
filing under section 6018. Similarly, the donee spouse could establish
that the transfer creating the qualifying income interest for life was
made before the effective date of section 2056(b)(7) or section
2523(f), whichever is applicable.
(c) Amount treated as a transfer--(1) In general. The amount
treated as a transfer under this section upon a disposition of all or
part of a qualifying income interest for life in qualified terminable
interest property is equal to the fair market value of the entire
property subject to the qualifying income interest, determined on the
date of the disposition (including any accumulated income and not
reduced by any amount excluded from total gifts under section 2503(b)
with respect to the transfer creating the interest), less the value of
the qualifying income interest in the property on the date of the
disposition. The gift tax consequences of the disposition of the
qualifying income interest are determined separately under
Sec. 25.2511-2.
(2) Disposition of interest in property with respect to which a
partial election was made. If, in connection with the transfer of
property that created the spouse's qualifying income interest for life,
a deduction was allowed under section 2056(b)(7) or section 2523(f) for
less than the entire interest in the property (i.e., for a fractional
or percentage share of the entire interest in the transferred property)
the amount treated as a transfer by the donee spouse under this section
is equal to the fair market value of the entire property subject to the
qualifying income interest on the date of the disposition, less the
value of the qualifying income interest for life, multiplied by the
fractional or percentage share of the interest for which the deduction
was taken.
(3) Reduction for distributions charged to nonelective portion of
trust. The amount determined under paragraph (c)(2) of this section (if
applicable) is appropriately reduced if--
(i) The donee spouse's interest is in a trust and distributions of
principal have been made to the donee spouse;
(ii) The trust provides that distributions of principal are made
first from the qualified terminable interest share of the trust; and
(iii) The donee spouse establishes the reduction in that share
based on the fair market value of the trust assets at the time of each
distribution.
(4) Effect of gift tax recovered under section 2207A on the amount
of the transfer. [Reserved]
(5) Interest in previously severed trust. If the donee spouse's
interest is in a trust consisting of only qualified terminable interest
property, and the trust was previously severed (in compliance with
Sec. 20.2056(b)-7(b)(2)(ii) of this chapter or Sec. 25.2523(f)-
l(b)(3)(ii) from a trust that, after the severance, held only property
that was not qualified terminable interest property, only the value of
the property in the severed portion of the trust at the time of the
disposition is treated as transferred under this section.
(d) Identification of property transferred. If only part of the
property in which a donee spouse has a qualifying income interest for
life is qualified terminable interest property, the donee spouse is, in
the case of a disposition of all or part of the income interest within
the meaning of section 2519, deemed to have transferred a pro rata
portion of the entire qualified terminable interest property for
purposes of this section.
(e) Exercise of power of appointment. The exercise by any person of
a power to appoint qualified terminable interest property to the donee
spouse is not treated as a disposition under section 2519, even though
the donee spouse subsequently disposes of the appointed property.
(f) Conversion of qualified terminable interest property. The
conversion of qualified terminable interest property into other
property in which the donee spouse has a qualifying income interest for
life is not, for purposes of this section, treated as a disposition of
the qualifying income interest. Thus, the sale and reinvestment of
assets of a trust holding qualified terminable interest property is not
a disposition of the qualifying income interest, provided that the
donee spouse continues to have a qualifying income interest for life in
the trust after the sale and reinvestment. Similarly, the sale of real
property in which the spouse possesses a legal life estate and thus
meets the requirements of qualified terminable interest property,
followed by the transfer of the proceeds into a trust which also meets
the requirements of qualified terminable interest property, or by the
reinvestment of the proceeds in income producing property in which the
donee spouse has a qualifying income interest for life, is not
considered a disposition of the qualifying income interest. On the
other hand, the sale of qualified terminable interest property,
followed by the payment to the donee spouse of a portion of the
proceeds equal to the value of the donee spouse's income interest, is
considered a disposition of the qualifying income interest.
(g) Examples. The following examples illustrate the application of
paragraphs (a) through (f) of this section. Except as provided
otherwise in the examples below, assume that the decedent, D, was
survived by spouse, S, that in each example the section 2503(b)
exclusion has already been fully utilized for each year with respect to
the donee in question, and that section 2503(e) is not applicable to
the amount deemed transferred.
Example 1. Transfer of the spouse's life estate in residence.
Under D's will, a personal residence valued for estate tax purposes
at $250,000 passes to S for life, and after S's death to D's
children. D's executor made a valid election to treat the property
as qualified terminable interest property. During 1995, when the
fair market value of the property is $300,000 and the value of S's
life interest in the property is $100,000, S makes a gift of S's
entire interest in the property to D's children. Pursuant to section
2519, S makes a gift in the amount of $200,000 (i.e., the fair
market value of the qualified terminable interest property of
$300,000 less the fair market value of S's qualifying income
interest in the property of $100,000). In addition, under section
2511, S makes a gift of $100,000 (i.e., the fair market value of S's
income interest in the property). See Sec. 25.2511-2.
Example 2. Sale of spouse's life estate. The facts are the same
as in Example 1 except that during 1995, S sells S's interest in the
property to D's children for $100,000. Pursuant to section 2519, S
makes a gift of $200,000 ($300,000 less $100,000 value of the
qualifying income interest in the property). S does not make a gift
of the income interest under section 2511, because the consideration
received for S's income interest is equal to the value of the income
interest.
Example 3. Transfer of income interest in trust subject to
partial election. D's will established a trust valued for estate tax
purposes at $500,000, all of the income of which is payable annually
to S for life. After S's death, the principal of the trust is to be
distributed to D's children. Assume that only 50 percent of the
trust was treated as qualified terminable interest property. During
1995, S makes a gift of all of S's interest in the trust to D's
children at which time the fair market value of the trust is
$400,000 and the fair market value of S's life income interest in
the trust is $100,000. Pursuant to section 2519, S makes a gift of
$150,000 (the fair market value of the qualified terminable interest
property, 50 percent of $400,000, less the $50,000 income interest
in the qualified terminable interest property). S also makes a gift
pursuant to section 2511 of $100,000 (i.e., the fair market value of
S's life income interest).
Example 4. Transfer of a portion of income interest in trust
subject to a partial election. The facts are the same as in Example
3 except that S makes a gift of only 40 percent of S's interest in
the trust. Pursuant to section 2519, S makes a gift of $150,000
(i.e., the fair market value of the qualified terminable interest
property, 50 percent of $400,000, less the $50,000 value of S's
qualified income interest in the qualified terminable interest
property). S also makes a gift pursuant to section 2511 of $40,000
(i.e., the fair market value of 40 percent of S's life income
interest). See also section 2702 for additional rules that may
affect the value of the total amount of S's gift under section 2519
to take into account the fact that S's 30 percent retained income
interest attributable to the qualifying income interest is valued at
zero under that section, thereby increasing the value of S's section
2519 gift to $180,000. In addition, under Sec. 25.2519-1(d), S's
disposition of 40 percent of the income interest is deemed to be a
transfer of a pro rata portion of the qualified terminable interest
property. Thus, assuming no further lifetime dispositions by S, 30
percent (60 percent of 50 percent) of the trust property is included
in S's gross estate under section 2036 and an adjustment is made to
S's adjusted taxable gifts under section 2001(b)(1)(B). If S later
disposes of all or a portion of the retained income interest, see
Sec. 25.2702-6.
Example 5. Transfer of a portion of spouse's interest in a trust
from which corpus was previously distributed to the spouse. D's will
established a trust valued for estate tax purposes at $500,000, all
of the income of which is payable annually to S for life. The
trustee is granted the discretion to distribute trust principal to
S. All appointments of principal must be made from the portion of
the trust subject to the section 2056(b)(7) election. After S's
death, the principal of the trust is to be distributed to D's
children. The executor makes the section 2056(b)(7) election with
respect to 50 percent of the trust. In 1994, pursuant to the terms
of D's will, the trustee distributed $50,000 of principal to S and
charged the entire distribution to the qualified terminable interest
portion of the trust.
Immediately prior to the distribution, the value of the entire
trust was $550,000 and the value of the qualified terminable
interest portion was $275,000 (50 percent of $550,000). Provided S
can establish the above facts, the qualified terminable interest
portion of the trust immediately after the distribution is $225,000
or 45 percent of the value of the trust ($225,000/$500,000). In
1996, when the value of the trust is $400,000 and the value of S's
income interest is $100,000, S makes a transfer of 40 percent of S's
income interest. S's gift under section 2519 is $135,000; i.e., the
fair market value of the qualified terminable interest property, 45
percent of $400,000 ($180,000), less the value of the income
interest in the qualified terminable interest property, $45,000 (45
percent of $100,000). S also makes a gift under section 2511 of
$40,000; i.e., the fair market value of 40 percent of S's income
interest. S's disposition of 40 percent of the income interest is
deemed to be a transfer under section 2519 of the entire 45 percent
portion of the remainder subject to the section 2056(b)(7) election.
Since S retained 60 percent of the income interest, 27 percent (60
percent of 45 percent) of the trust property is includible in S's
gross estate under section 2036. See also section 2702 and Example 4
as to the principles applicable in valuing S's gift under section
2702 and adjusted taxable gifts upon S's subsequent death.
Example 6. Transfer of Spousal Annuity Payable From Trust. D
died prior to October 24, 1992. D's will established a trust valued
for estate tax purposes at $500,000. The trust instrument required
the trustee to pay an annuity to S of $20,000 a year for life. All
the trust income other than the amounts paid to S as an annuity are
to be accumulated in the trust and may not be distributed during S's
lifetime to any person other than S. After S's death, the principal
of the trust is to be distributed to D's children. Because D died
prior to the effective date of section 1941 of the Energy Policy Act
of 1992, S's annuity interest qualifies as a qualifying income
interest for life. Under Sec. 20.2056(b)-7(e) of this chapter, based
on an applicable 10 percent interest rate, 40 percent of the
property, or $200,000, is the value of the deductible interest.
During 1996, S makes a gift of the annuity interest to D's children
at which time the fair market value of the trust is $800,000 and the
fair market value of S's annuity interest in the trust is $100,000.
Pursuant to section 2519, S is treated as making a gift of $220,000
(the fair market value of the qualified terminable interest
property, 40 percent of $800,000 ($320,000), less the $100,000
annuity interest in the qualified terminable interest property). S
is also treated pursuant to section 2511 as making a gift of
$100,000 (the fair market value of S's annuity interest).
Sec. 25.2519-2 Effective date.
Except as specifically provided in Sec. 25.2519-1(g), Example 6,
the provisions of Sec. 25.2519-1 are effective with respect to gifts
made after March 1, 1994. With respect to gifts made on or before such
date, the donee spouse of a section 2056(b)(7) or section 2523(f)
transfer may rely on any reasonable interpretation of the statutory
provisions. For these purposes, the provisions of Sec. 25.2519-1 (as
well as project LR-211-76, 1984-1 C.B., page 598, see
Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a reasonable
interpretation of the statutory provisions.
Par. 28. Section 25.2522(c)-4 is added to read as follows:
Sec. 25.2522(c)-4 Disallowance of double deduction in the case of
qualified terminable interest property.
No deduction is allowed under section 2522 for the transfer of an
interest in property if a deduction is taken from the total amount of
gifts with respect to that property by reason of section 2523(f). See
Sec. 25.2523(h)-1.
Par. 29. Section 25.2523(a)-1 is amended as follows:
a. Paragraph (a) is revised.
b. Paragraph (b)(3)(ii) is revised.
c. Paragraphs (c) and (d) are redesignated as paragraphs (d) and
(e), respectively.
d. New paragraph (c) is added.
e. Newly designated paragraph (d) is amended by:
1. Revising the paragraph heading.
2. Revising the introductory text.
3. The designations ``(1)'', ``(2)'', ``(3)'', ``(4)'', ``(5)'',
``(6)'', ``(7)'' appearing before each example are revised to read
``1.'', ``2.'', ``3.'', ``4.'', ``5.'', ``6.'', ``7.''.
4. Example 8 is added.
f. Newly designated paragraph (e) is amended by revising the first
sentence.
g. The revisions and additions read as follows:
Sec. 25.2523(a)-1 Gift to spouse; in general.
(a) In general. In determining the amount of taxable gifts for the
calendar quarter (with respect to gifts made after December 31, 1970,
and before January 1, 1982), or calendar year (with respect to gifts
made before January 1, 1971, or after December 31, 1981), a donor may
deduct the value of any property interest transferred by gift to a
donee who at the time of the gift is the donor's spouse, except as
limited by paragraphs (b) and (c) of this section. See Sec. 25.2502-
l(c)(1) for the definition of calendar quarter. This deduction is
referred to as the marital deduction. In the case of gifts made prior
to July 14, 1988, no marital deduction is allowed with respect to a
gift if, at the time of the gift, the donor is a nonresident not a
citizen of the United States. Further, in the case of gifts made on or
after July 14, 1988, no marital deduction is allowed (regardless of the
donor's citizenship or residence) for transfers to a spouse who is not
a citizen of the United States at the time of the transfer. However,
for certain special rules applicable in the case of estate and gift tax
treaties, see section 7815(d)(14) of Public Law 101-239. The donor must
submit any evidence necessary to establish the donor's right to the
marital deduction.
(b) * * *
(3) * * *
(ii) Any property interest transferred by a donor to the donor's
spouse is a nondeductible interest to the extent it is not required to
be included in a gift tax return for a calendar quarter (for gifts made
after December 31, 1970, and before January 1, 1982) or calendar year
(for gifts made before January 1, 1971, or after December 31, 1981).
(c) Computation--(1) In general. The amount of the marital
deduction depends upon when the interspousal gifts are made, whether
the gifts are terminable interests, whether the limitations of
Sec. 25.2523(f)-1A (relating to gifts of community property before
January 1, 1982) are applicable, and whether Sec. 25.2523(f)-1
(relating to the election with respect to life estates) is applicable,
and (with respect to gifts made on or after July 14, 1988) whether the
donee spouse is a citizen of the United States (see section 2523(i)).
(2) Gifts prior to January 1, 1977. Generally, with respect to
gifts made during a calendar quarter prior to January 1, 1977, the
marital deduction allowable under section 2523 is 50 percent of the
aggregate value of the deductible interests. See section 2524 for an
additional limitation on the amount of the allowable deduction.
(3) Gifts after December 31, 1976, and before January 1, 1982.
Generally, with respect to gifts made during a calendar quarter
beginning after December 31, 1976, and ending prior to January 1, 1982,
the marital deduction allowable under section 2523 is computed as a
percentage of the deductible interests in those gifts. If the aggregate
amount of deductions for such gifts is $100,000 or less, a deduction is
allowed for 100 percent of the deductible interests. No deduction is
allowed for otherwise deductible interests in an aggregate amount that
exceeds $100,000 and is equal to or less than $200,000. For deductible
interests in excess of $200,000, the deduction is limited to 50 percent
of such deductible interests. If a donor remarries, the computations in
this paragraph (c)(3) are made on the basis of aggregate gifts to all
persons who at the time of the gifts are the donor's spouse. See
section 2524 for an additional limitation on the amount of the
allowable deduction.
(4) Gifts after December 31, 1981. Generally, with respect to gifts
made during a calendar year beginning after December 31, 1981 (other
than gifts made on or after July 14, 1988, to a spouse who is not a
United States citizen on the date of the transfer), the marital
deduction allowable under section 2523 is 100 percent of the aggregate
value of the deductible interests. See section 2524 for an additional
limitation on the amount of the allowable deduction, and section
2523(i) regarding disallowance of the marital deduction for gifts to a
spouse who is not a United States citizen.
(d) Examples. The following examples (in which it is assumed that
the donors have previously utilized any specific exemptions provided by
section 2521 for gifts prior to January 1, 1977) illustrate the
application of paragraph (c) of this section and the interrelationship
of sections 2523 and 2503.
* * * * *
Example 8. A donor made a transfer by gift to the donor's
spouse, a United States citizen, of $200,000 cash on January 1,
1995. The donor made no other transfers during 1995. For calendar
year 1995, the amount excluded under section 2503(b) is $10,000; the
marital deduction is $190,000; and the amount of taxable gifts is
zero ($200,000--$10,000 (annual exclusion)--$190,000 (marital
deduction)).
(e) Valuation. If the income from property is made payable to the
donor or another individual for life or for a term of years, with
remainder to the donor's spouse or to the estate of the donor's spouse,
the marital deduction is computed (pursuant to Sec. 25.2523(a)-1(c))
with respect to the present value of the remainder, determined under
section 7520. * * *
Par. 30. Section 25.2523(b)-1 is amended as follows:
a. Paragraph (a)(1) is revised.
b. In paragraph (b)(3), the first sentence is amended by removing
the reference ``Sec. 25.2523(e)-1'' and adding ``Sec. 25.2523(e)-l or
25.2523(f)-l'' in its place.
c. In paragraph (b)(3), the designations ``(1)'' and ``(2)''
appearing before each example are revised to read ``1.'' and ``2.''
d. In paragraph (b)(3), the phrase immediately preceding Example 1
is revised.
e. In paragraph (b)(6), the designations ``(1)'', ``(2)'', ``(3)'',
``(4)'', ``(5)'', ``(6)'' appearing before each example are revised to
read ``l.'', ``2.'', ``3.'', ``4.'', ``5.'', ``6.''.
f. In paragraph (b)(6), the phrase immediately preceding Example 1
is revised.
g. In paragraph (c)(2), the phrase immediately preceding the
example is removed and a sentence is added in its place.
h. The additions and revisions read as follows:
Sec. 25.2523(b)-1 Life estate or other terminable interest.
(a) In general. (1) The provisions of section 2523(b) generally
disallow a marital deduction with respect to certain property interests
(referred to generally as terminable interests and defined in paragraph
(a)(3) of this section) transferred to the donee spouse under the
circumstances described in paragraph (a)(2) of this section, unless the
transfer comes within the purview of one of the exceptions set forth in
Sec. 25.2523(d)-1 (relating to certain joint interests);
Sec. 25.2523(e)-1 (relating to certain life estates with powers of
appointment); Sec. 25.2523(f)-1 (relating to certain qualified
terminable interest property); or Sec. 25.2523(g)-1 (relating to
certain qualified charitable remainder trusts).
* * * * *
(b) * * *
(3) * * * The following examples, in which it is assumed that the
donor did not make an election under sections 2523(f)(2)(C) and (f)(4),
illustrate the application of the provisions of this paragraph (b)(3):
* * * * *
(6) * * * In each example, it is assumed that the donor made no
election under sections 2523(f)(2)(C) and (f)(4) and that the property
interest that the donor transferred to a person other than the donee
spouse is not transferred for adequate and full consideration in money
or money's worth: * * *
(c) * * *
(2) * * * The application of this paragraph may be further
illustrated by the following example, in which it is assumed that the
donor made no election under sections 2523(f)(2)(C) and (f)(4).
* * * * *
Par. 31. Sec. 25.2523(c)-1 is amended by removing the first
sentence of paragraph (c) and adding three new sentences in its place
to read as follows:
Sec. 25.2523(c)-1 Interest in unidentified assets.
* * * * *
(c) If both of the circumstances set forth in paragraph (b) of this
section exist, only a portion of the property interest passing to the
spouse is a deductible interest. The portion qualifying as a deductible
interest is an amount equal to the excess, if any, of the value of the
property interest passing to the spouse over the aggregate value of the
asset (or assets) that if transferred to the spouse would not qualify
for the marital deduction. See paragraph (c) of Sec. 25.2523(a)-l to
determine the percentage of the deductible interest allowable as a
marital deduction. * * *
* * * * *
Par. 32. The third sentence of Sec. 25.2523(d)-1 is revised to read
as follows:
Sec. 25.2523(d)-1 Joint interests.
* * * Thus, if the donor purchased real property in the name of the
donor and the donor's spouse as tenants by the entirety or as joint
tenants with rights of survivorship, a marital deduction is allowable
with respect to the value of the interest of the donee pouse in the
property (subject to the limitations set forth in Sec. 25.2523(a)-1). *
* *
Par. 33. Section 25.2523(e)-1, paragraph (c) is revised to read as
follows:
Sec. 25.2523(e)-1 Marital deduction; life estate with power of
appointment in donee spouse.
* * * * *
(c) Meaning of specific portion--(1) In general. Except as provided
in paragraphs (c)(2) and (c)(3) of this section, a partial interest in
property is not treated as a specific portion of the entire interest.
In addition, any specific portion of an entire interest in property is
nondeductible to the extent the specific portion is subject to invasion
for the benefit of any person other than the donee spouse, except in
the case of a deduction allowable under section 2523(e), relating to
the exercise of a general power of appointment by the donee spouse.
(2) Fraction or percentage share. Under section 2523(e), a partial
interest in property is treated as a specific portion of the entire
interest if the rights of the donee spouse in income, and the required
rights as to the power described in Sec. 25.2523(e)-1(a), constitute a
fractional or percentage share of the entire property interest, so that
the donee spouse's interest reflects its proportionate share of the
increase or decrease in the value of the entire property interest to
which the income rights and the power relate. Thus, if the spouse's
right to income and the spouse's power extend to a specified fraction
or percentage of the property, or its equivalent, the interest is in a
specific portion of the property. In accordance with paragraph (b) of
this section, if the spouse has the right to receive the income from a
specific portion of the trust property (after applying paragraph (c)(3)
of this section) but has a power of appointment over a different
specific portion of the property (after applying paragraph (c)(3) of
this section), the marital deduction is limited to the lesser specific
portion.
(3) Special rule in the case of gifts made on or before October 24,
1992. In the case of gifts within the purview of the effective date
rule contained in paragraph (c)(3)(iii) of this section:
(i) A specific sum payable annually, or at more frequent intervals,
out of the property and its income that is not limited by the income of
the property is treated as the right to receive the income from a
specific portion of the property. The specific portion, for purposes of
paragraph (c)(2) of this section, is the portion of the property that,
assuming the interest rate generally applicable for the valuation of
annuities at the time of the donor's gift, would produce income equal
to such payments. However, a pecuniary amount payable annually to a
donee spouse is not treated as a right to the income from a specific
portion of trust property for purposes of this paragraph (c)(3)(i) if
any person other than the donee spouse may receive, during the donee
spouse's lifetime, any distribution of the property. To determine the
applicable interest rate for valuing annuities, see sections 2512 and
7520 and the regulations under those sections.
(ii) The right to appoint a pecuniary amount out of a larger fund
(or trust corpus) is considered the right to appoint a specific portion
of such fund or trust in an amount equal to such pecuniary amount.
(iii) The rules contained in paragraphs (c)(3) (i) and (ii) of this
section apply with respect to gifts made on or before October 24, 1992.
(4) Local law. A partial interest in property is treated as a
specific portion of the entire interest if it is shown that the donee
spouse has rights under local law that are identical to those the donee
spouse would have acquired had the partial interest been expressed in
terms satisfying the requirements of paragraph (c)(2) of this section
(or paragraph (c)(3) of this section if applicable).
(5) Examples. The following examples illustrate the application of
paragraphs (b) and (c) of this section, where D, the donor, transfers
property to D's spouse, S:
Example 1. Spouse entitled to the lesser of an annuity or a
fraction of trust income. Prior to October 24, 1992, D transferred
in trust 500 identical shares of X Company stock, valued for gift
tax purposes at $500,000. The trust provided that during the
lifetime of D's spouse, S, the trustee is to pay annually to S the
lesser of one-half of the trust income or $20,000. Any trust income
not paid to S is to be accumulated in the trust and may not be
distributed during S's lifetime. S has a testamentary general power
of appointment over the entire trust principal. The applicable
interest rate for valuing annuities as of the date of D's gift under
section 7520 is 10 percent. For purposes of paragraphs (a) through
(c) of this section, S is treated as receiving all of the income
from the lesser of one-half of the stock ($250,000), or $200,000,
the specific portion of the stock which, as determined in accordance
with Sec. 25.2523(e)-1(c)(3)(i) of this chapter, would produce
annual income of $20,000 (20,000/.10). Accordingly, the marital
deduction is limited to $200,000 (200,000/500,000 or \2/5\ of the
value of the trust.)
Example 2. Spouse possesses power and income interest over
different specific portions of trust. The facts are the same as in
Example 1 except that S's testamentary general power of appointment
is exercisable over only \1/4\ of the trust principal. Consequently,
under section 2523(e), the marital deduction is allowable only for
the value of \1/4\ of the trust ($125,000); i.e., the lesser of the
value of the portion with respect to which S is deemed to be
entitled to all of the income (\2/5\ of the trust or $200,000), or
the value of the portion with respect to which S possesses the
requisite power of appointment (\1/4\ of the trust or $125,000).
Example 3. Power of appointment over shares of stock constitutes
a power over a specific portion. D transferred 250 identical shares
of Y company stock to a trust under the terms of which trust income
is to be paid annually to S, during S's lifetime. S was given a
testamentary general power of appointment over 100 shares of stock.
The trust provides that if the trustee sells the Y company stock,
S's general power of appointment is exercisable with respect to the
sale proceeds or the property in which the proceeds are reinvested.
Because the amount of property represented by a single share of
stock would be altered if the corporation split its stock, issued
stock dividends, made a distribution of capital, etc., a power to
appoint 100 shares at the time of S's death is not necessarily a
power to appoint the entire interest that the 100 shares represented
on the date of D's gift. If it is shown that, under local law, S has
a general power to appoint not only the 100 shares designated by D
but also 100/250 of any distributions by the corporation that are
included in trust principal, the requirements of paragraph (c)(2) of
this section are satisfied and S is treated as having a general
power to appoint 100/250 of the entire interest in the 250 shares.
In that case, the marital deduction is limited to 40 percent of the
trust principal. If local law does not give S that power, the 100
shares would not constitute a specific portion under
Sec. 25.2523(e)-1(c) (including Sec. 25.2523(e)-1(c)(3)(ii)). The
nature of the asset is such that a change in the capitalization of
the corporation could cause an alteration in the original value
represented by the shares at the time of the transfer and is thus
not a specific portion of the trust.
* * * * *
Par. 34. An undesignated center heading is added immediately
following Sec. 25.2524-1 to read as follows: ``Deductions Prior to
1982''
Par. 35. Section 25.2523(f)-1 is redesignated as Sec. 25.2523(f)-1A
under the new undesignated center heading ``Deductions Prior to 1982''
and amended as follows:
(a) The section heading of newly designated Sec. 25.2523(f)-1A is
revised.
(b) The first sentence of paragraph (a) is revised.
(c) The revisions read as follows:
Sec. 25.2523(f)-1 A Special rule applicable to community property
transferred prior to January 1, 1982.
(a) In general. With respect to gifts made prior to January 1,
1982, the marital deduction is allowable with respect to any transfer
by a donor to the donor's spouse only to the extent that the transfer
is shown to represent a gift of property that was not, at the time of
the gift, held as community property, as defined in paragraph (b) of
this section. * * *
* * * * *
Par. 36. New Secs. 25.2523(f)-1, 25.2523(g)-1, 25.2523(h)-1 and
25.2523(h)-2 are added to read as follows:
Sec. 25.2523(f)-1 Election with respect to life estate transferred to
donee spouse.
(a) In general. (1) With respect to gifts made after December 31,
1981, subject to section 2523(i), a marital deduction is allowed under
section 2523(a) for transfers of qualified terminable interest
property. Qualified terminable interest property is terminable interest
property described in section 2523(b)(1) that satisfies the
requirements of section 2523(f)(2) and this section. Terminable
interests that are described in section 2523(b)(2) cannot qualify as
qualified terminable interest property. Thus, if the donor retains a
power described in section 2523(b)(2) to appoint an interest in
qualified terminable interest property, no deduction is allowable under
section 2523(a) for the property.
(2) All of the property for which a deduction is allowed under this
paragraph (a) is treated as passing to the donee spouse (for purposes
of Sec. 25.2523(a)-1), and no part of the property is treated as
retained by the donor or as passing to any person other than the donee
spouse (for purposes of Sec. 25.2523(b)-1(b)).
(b) Qualified terminable interest property--(1) Definition. Section
2523(f)(2) provides the definition of qualified terminable interest
property.
(2) Meaning of property. For purposes of section 2523(f)(2), the
term property generally means an entire interest in property (within
the meaning of Sec. 25.2523(e)-l(d)) or a specific portion of the
entire interest (within the meaning of Sec. 25.2523(e)-l(c)).
(3) Property for which the election may be made--(i) In general.
The election may relate to all or any part of property that meets the
requirements of section 2523(f)(2) (A) and (B), provided that any
partial election must be made with respect to a fractional or
percentage share of the property so that the elective portion reflects
its proportionate share of the increase or decrease in the entire
property for purposes of applying sections 2044 or 2519. Thus, if the
interest of the donee spouse in a trust (or other property in which the
spouse has a qualifying income interest) meets the requirements of this
section, the election may be made under section 2523(f)(2)(C) with
respect to a part of the trust (or other property) only if the election
relates to a defined fraction or percentage of the entire trust (or
other property) or specific portion thereof within the meaning of
Sec. 25.2523(e)-1(c). The fraction or percentage may be defined by
formula.
(ii) Division of trusts. If the interest of the donee spouse in a
trust meets the requirements of this section, the trust may be divided
into separate trusts to reflect a partial election that has been made,
if authorized under the terms of the governing instrument or otherwise
permissible under local law. A trust may be divided only if the
fiduciary is required, either by applicable local law or by the express
or implied provisions of the governing instrument, to divide the trust
according to the fair market value of the assets of the trust at the
time of the division. The division of the trusts must be done on a
fractional or percentage basis to reflect the partial election.
However, the separate trusts do not have to be funded with a pro rata
portion of each asset held by the undivided trust.
(4) Manner and time of making election. (i) An election under
section 2523(f)(2)(C) (other than a deemed election with respect to a
joint and survivor annuity as described in section 2523(f)(6)), is made
on a gift tax return for the calendar year in which the interest is
transferred. The return must be filed within the time prescribed by
section 6075(b) (determined without regard to section 6019(a)(2)),
including any extensions authorized under section 6075(b)(2) (relating
to an automatic extension of time for filing a gift tax return where
the donor is granted an extension of time to file the income tax
return).
(ii) If the election is made on a return for the calendar year that
includes the date of death of the donor, the return (as prescribed by
section 6075(b)(3)) must be filed no later than the time (including
extensions) for filing the estate tax return. The election, once made,
is irrevocable.
(c) Qualifying income interest for life--(1) In general. For
purposes of this section, the term qualifying income interest for life
is defined as provided in section 2056(b)(7)(B)(ii) and
Sec. 20.2056(b)-7(d)(1).
(i) Entitled for life to all the income. The principles outlined in
Sec. 25.2523(e)-1(f) (relating to whether the spouse is entitled for
life to all of the income from the entire interest or a specific
portion of the entire interest) apply in determining whether the donee
spouse is entitled for life to all the income from the property,
regardless of whether the interest passing to the donee spouse is in
trust. An income interest granted for a term of years, or a life estate
subject to termination upon the occurrence of a specified event (e.g.,
divorce) is not a qualifying income interest for life.
(ii) Income between last distribution date and date of spouse's
death. An income interest does not fail to constitute a qualifying
income interest for life solely because income for the period between
the last distribution date and the date of the donee spouse's death is
not required to be distributed to the estate of the donee spouse. See
Sec. 20.2044-1 of this chapter relating to the inclusion of such
undistributed income in the gross estate of the donee spouse.
(iii) Pooled income funds. An income interest in a pooled income
fund described in section 642(c)(5) constitutes a qualifying income
interest for life for purposes of this section.
(iv) Distribution of principal for the benefit of the donee spouse.
An income interest does not fail to constitute a qualifying income
interest for life solely because the trustee has a power to distribute
principal to or for the benefit of the donee spouse. The fact that
property distributed to a donee spouse may be transferred by the spouse
to another person does not result in a failure to satisfy the
requirement of section 2056(b)(7)(B)(ii)(II). However, if the governing
instrument requires the donee spouse to transfer the distributed
property to another person without full and adequate consideration in
money or money's worth, the requirement of section
2056(b)(7)(B)(ii)(II) is not satisfied.
(2) Immediate right to income. In order to constitute a qualifying
income interest for life, the donee spouse must be granted the
immediate right to receive the income from the property. Thus, an
income interest does not constitute a qualifying income interest for
life if the donee spouse receives the right to trust income commencing
at some time in the future, e.g., on the termination of a preceding
life income interest of the donor spouse.
(3) Annuities payable from trusts in the case of gifts made on or
before October 24, 1992. (i) In the case of gifts made on or before
October 24, 1992, a donee spouse's lifetime annuity interest payable
from a trust or other group of assets passing from the donor is treated
as a qualifying income interest for life for purposes of section
2523(f)(2)(B). The deductible interest, for purposes of
Sec. 25.2523(a)-1(b), is the specific portion of the property that,
assuming the applicable interest rate for valuing annuities at the time
the annuity interest is transferred, would produce income equal to the
minimum amount payable annually to the donee spouse. If, based on the
applicable interest rate, the entire property from which the annuity
may be satisfied is insufficient to produce income equal to the minimum
annual payment, the value of the deductible interest is the entire
value of the property. The value of the deductible interest may not
exceed the value of the property from which the annuity is payable. If
the annual payment may increase, the increased amount is not taken into
account in valuing the deductible interest.
(ii) An annuity interest is not treated as a qualifying income
interest for life for purposes of section 2523(f)(2)(B) if any person
other than the donee spouse may receive during the donee spouse's
lifetime, any distribution of the property or its income from which the
annuity is payable.
(iii) To determine the applicable interest rate for valuing
annuities, see sections 2512 and 7520 and the regulations under those
sections.
(4) Joint and survivor annuities. [Reserved]
(d) Treatment of interest retained by the donor spouse--(1) In
general. Under section 2523(f)(5)(A), if a donor spouse retains an
interest in qualified terminable interest property, any subsequent
transfer by the donor spouse of the retained interest in the property
is not treated as a transfer for gift tax purposes. Further, the
retention of the interest until the donor spouse's death does not cause
the property subject to the retained interest to be includable in the
gross estate of the donor spouse.
(2) Exception. Under section 2523(f)(5)(B), the rule contained in
paragraph (d)(1) of this section does not apply to any property after
the donee spouse is treated as having transferred the property under
section 2519, or after the property is includable in the gross estate
of the donee spouse under section 2044.
(e) Application of local law. The provisions of local law are taken
into account in determining whether or not the conditions of section
2523(f)(2) (A) and (B), and the conditions of paragraph (c) of this
section, are satisfied. For example, silence of a trust instrument on
the frequency of payment is not regarded as a failure to satisfy the
requirement that the income must be payable to the donee spouse
annually or more frequently unless applicable local law permits
payments less frequently to the donee spouse.
(f) Examples. The following examples illustrate the application of
this section, where D, the donor, transfers property to D's spouse, S.
Unless stated otherwise, it is assumed that S is not the trustee of any
trust established for S's benefit:
Example 1. Life estate in residence. D transfers by gift a
personal residence valued at $250,000 on the date of the gift to S
and D's children, giving S the exclusive and unrestricted right to
use the property (including the right to continue to occupy the
property as a personal residence or rent the property and receive
the income for her lifetime). After S's death, the property is to
pass to D's children. Under applicable local law, S's consent is
required for any sale of the property. If D elects to treat all of
the transferred property as qualified terminable interest property,
the deductible interest is $250,000, the value of the property for
gift tax purposes.
Example 2. Power to make property productive. D transfers assets
having a fair market value of $500,000 to a trust pursuant to which
S is given the right exercisable annually to require distribution of
all the trust income to S. No trust property may be distributed
during S's lifetime to any person other than S. The assets used to
fund the trust include both income producing assets and
nonproductive assets. Applicable local law permits S to require that
the trustee either make the trust property productive or sell the
property and reinvest the proceeds in productive property within a
reasonable time after the transfer. If D elects to treat the entire
trust as qualified terminable interest property, the deductible
interest is $500,000. If D elects to treat only 20 percent of the
trust as qualified terminable interest property, the deductible
interest is $100,000; i.e., 20 percent of $500,000.
Example 3. Power of distribution over fraction of trust income.
The facts are the same as in Example 2 except that S is given the
power exercisable annually to require distribution to S of only 50
percent of the trust income for life. The remaining trust income may
be accumulated or distributed among D's children and S in the
trustee's discretion. The maximum amount that D may elect to treat
as qualified terminable interest property is $250,000; i.e., the
value of the trust for gift tax purposes ($500,000) multiplied by
the percentage of the trust in which S has a qualifying income
interest for life (50 percent). If D elects to treat only 20 percent
of the portion of the trust in which S has a qualifying income
interest as qualified terminable interest property, the deductible
interest is $50,000; i.e, 20 percent of $250,000.
Example 4. Power to distribute trust corpus to other
beneficiaries. D transfers $500,000 to a trust providing that all
the trust income is to be paid to D's spouse, S, during S's
lifetime. The trustee is given the power to use annually $5,000 from
the trust for the maintenance and support of S's minor child, C. Any
such distribution does not necessarily relieve S of S's obligation
to support and maintain C. S does not have a qualifying income
interest for life in any portion of the trust because the gift fails
to satisfy the condition in sections 2523(f)(3) and
2056(b)(7)(B)(ii)(II) that no person have a power, other than a
power the exercise of which takes effect only at or after S's death,
to appoint any part of the property to any person other than S. The
trust would also be nondeductible under section 2523(f) if S, rather
than the trustee, were given the power to appoint a portion of the
principal to C. However, in the latter case, if S made a qualified
disclaimer (within the meaning of section 2518) of the power to
appoint to C, the trust could qualify for the marital deduction
pursuant to section 2523(f), assuming that the power was personal to
S and S's disclaimer terminates the power. Similarly, if C made a
qualified disclaimer of the right to receive distributions from the
trust, the trust would qualify under section 2523(f) assuming that
C's disclaimer effectively negates the trustee's power under local
law.
Example 5. Spouse's interest terminable on divorce. The facts
are the same as in Example 3 except that if S and D divorce, S's
interest in the trust will pass to C. S's income interest is not a
qualifying income interest for life because it is terminable upon
S's divorce. Therefore, no portion of the trust is deductible under
section 2523(f).
Example 6. Spouse's interest in trust in the form of an annuity.
Prior to October 24, 1992, D established a trust funded with income
producing property valued for gift tax purposes at $800,000. The
trustee is required by the trust instrument to pay $40,000 a year to
S for life. Any income in excess of the annuity amount is to be
accumulated in the trust and may not be distributed during S's
lifetime. S's lifetime annuity interest is treated as a qualifying
income interest for life. If D elects to treat the entire portion of
the trust in which S has a qualifying income interest as qualified
terminable interest property, the value of the deductible interest
is $400,000, because that amount would yield an income to S of
$40,000 a year (assuming a 10 percent interest rate applies in
valuing annuities at the time of the transfer).
Example 7. Value of spouse's annuity exceeds value of trust
corpus. The facts are the same as in Example 6, except that the
trustee is required to pay S $100,000 a year for S's life. If D
elects to treat the entire portion of the trust in which S has a
qualifying income interest for life as qualified terminable interest
property, the value of the deductible interest is $800,000, which is
the lesser of the entire value of the property ($800,000) or the
amount of property that (assuming a 10 percent interest rate) would
yield an income to S of $100,000 a year ($1,000,000).
Example 8. Transfer to pooled income fund. D transfers $200,000
on June 1, 1994, to a pooled income fund (described in section
642(c)(5)) designating S as the only life income beneficiary. If D
elects to treat the entire $200,000 as qualified terminable interest
property, the deductible interest is $200,000.
Example 9. Retention by donor spouse of income interest in
property. On October 1, 1994, D transfers property to an irrevocable
trust under the terms of which trust income is to be paid to D for
life, then to S for life and, on S's death, the trust corpus is to
be paid to D's children. Because S does not possess an immediate
right to receive trust income, S's interest does not qualify as a
qualifying income interest for life under section 2523(f)(2).
Further, under section 2702(a)(2) and Sec. 25.2702-2(b), D is
treated for gift tax purposes as making a gift with a value equal to
the entire value of the property. If D dies in 1996 survived by S,
the trust corpus will be includible in D's gross estate under
section 2036. However, in computing D's estate tax liability, D's
adjusted taxable gifts under section 2001(b)(1)(B) are adjusted to
reflect the inclusion of the gifted property in D's gross estate. In
addition, if S survives D, the trust property is eligible for
treatment as qualified terminable interest property under section
2056(b)(7) in D's estate.
Example 10. Retention by donor spouse of income interest in
property. On October 1, 1994, D transfers property to an irrevocable
trust under the terms of which trust income is to be paid to S for
life, then to D for life and, on D's death, the trust corpus is to
be paid to D's children. D elects under section 2523(f) to treat the
property as qualified terminable interest property. D dies in 1996,
survived by S. S subsequently dies in 1998. Under Sec. 2523(f)-
1(d)(1), because D elected to treat the transfer as qualified
terminable interest property, no part of the trust corpus is
includible in D's gross estate because of D's retained interest in
the trust corpus. On S's subsequent death in 1998, the trust corpus
is includible in S's gross estate under section 2044.
Example 11. Retention by donor spouse of income interest in
property. The facts are the same as in Example 10, except that S
dies in 1996 survived by D, who subsequently dies in 1998. Because D
made an election under section 2523(f) with respect to the trust, on
S's death the trust corpus is includible in S's gross estate under
section 2044. Accordingly, under section 2044(c), S is treated as
the transferor of the property for estate and gift tax purposes.
Upon D's subsequent death in 1998, because the property was subject
to inclusion in S's gross estate under section 2044, the exclusion
rule in Sec. 25.2523(f)-1(d)(1) does not apply under
Sec. 25.2523(f)-1(d)(2). However, because S is treated as the
transferor of the property, the property is not subject to inclusion
in D's gross estate under section 2036 or section 2038. If the
executor of S's estate made a section 2056(b)(7) election with
respect to the trust, the trust is includible in D's gross estate
under section 2044 upon D's later death.
Sec. 25.2523(g)-1 Special rule for charitable remainder trusts.
(a) In general. (1) With respect to gifts made after December 31,
1981, subject to section 2523(i), if the donor's spouse is the only
noncharitable beneficiary (other than the donor) of a charitable
remainder annuity trust or charitable remainder unitrust described in
section 664 (qualified charitable remainder trust), section 2523(b)
does not apply to the interest in the trust transferred to the donee
spouse. Thus, the value of the annuity or unitrust interest passing to
the spouse qualifies for a marital deduction under section 2523(g) and
the value of the remainder interest qualifies for a charitable
deduction under section 2522.
(2) A marital deduction for the value of the donee spouse's annuity
or unitrust interest in a qualified charitable remainder trust to which
section 2523(g) applies is allowable only under section 2523(g).
Therefore, if an interest in property qualifies for a marital deduction
under section 2523(g), no election may be made with respect to the
property under section 2523(f).
(3) The donee spouse's interest need not be an interest for life to
qualify for a marital deduction under section 2523(g). However, for
purposes of section 664, an annuity or unitrust interest payable to the
spouse for a term of years cannot be payable for a term that exceeds 20
years or the trust does not qualify under section 2523(g).
(4) A deduction is allowed under section 2523(g) even if the
transfer to the donee spouse is conditioned on the donee spouse's
payment of state death taxes, if any, attributable to the qualified
charitable remainder trust.
(5) For purposes of this section, the term noncharitable
beneficiary means any beneficiary of the qualified charitable remainder
trust other than an organization described in section 170(c).
(b) Charitable remainder trusts where the donee spouse and the
donor are not the only noncharitable beneficiaries. In the case of a
charitable remainder trust where the donor and the donor's spouse are
not the only noncharitable beneficiaries (for example, where the
noncharitable interest is payable to the donor's spouse for life and
then to another individual (other than the donor) for life), the
qualification of the interest as qualified terminable interest property
is determined solely under section 2523(f) and not under section
2523(g). Accordingly, if the transfer to the trust is made prior to
October 24, 1992, the spousal annuity or unitrust interest may qualify
under Sec. 25.2523(f)-(1)(c)(3) as a qualifying income interest for
life.
Sec. 25.2523(h)-1 Denial of double deduction.
The value of an interest in property may not be deducted for
Federal gift tax purposes more than once with respect to the same
donor. For example, assume that D, a donor, transferred a life estate
in a farm to D's spouse, S, with a remainder to charity and that D
elects to treat the property as qualified terminable interest property.
The entire value of the property is deductible under section 2523(f).
No part of the value of the property qualifies for a charitable
deduction under section 2522 for gift tax purposes.
Sec. 25.2523(h)-2 Effective dates.
Except as specifically provided, in Secs. 25.2523(e)-1(c)(3),
25.2523(f)-1(c)(3), and 25.2523(g)-1(b), the provisions of
Secs. 25.2523(e)-1(c), 25.2523(f)-1, 25.2523(g)-1, and 25.2523(h)-1 are
effective with respect to gifts made after March 1, 1994. With respect
to gifts made on or before such date, donors may rely on any reasonable
interpretation of the statutory provisions. For these purposes, the
provisions of Secs. 25.2523(e)-1(c), 25.2523(f)-1, 25.2523(g)-1, and
25.2523(h)-1, (as well as project LR-211-76, 1984-1 C.B., page 598, see
Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a reasonable
interpretation of the statutory provisions.
Par. 37. Section 25.6019-1 is amended as follows:
a. Paragraphs (a) and (b) are revised.
b. Paragraphs (c) and (d) are redesignated paragraphs (g) and (h).
c. New paragraphs (c) through (f) are added.
d. The revisions and additions read as follows:
Sec. 25.6019-1 Persons required to file returns.
(a) Gifts made after December 31, 1981. Subject to section
2523(i)(2), an individual citizen or resident of the United States who
in any calendar year beginning after December 31, 1981, makes any
transfer by gift other than a transfer that, under section 2503 (b) or
(e) (relating, respectively, to certain gifts of $10,000 per donee and
the exclusion for payment of certain educational and medical expenses),
is not included in the total amount of gifts for that year, or a
transfer of an interest with respect to which a marital deduction is
allowed for the value of the entire interest under section 2523 (other
than a marital deduction allowed by reason of section 2523(f),
regarding qualified terminable interest property for which a return
must be filed in order to make the election under that section), must
file a gift tax return on Form 709 for that calendar year.
(b) Gifts made after December 31, 1976, and before January 1, 1982.
An individual citizen or resident of the United States who makes a
transfer by gift within any calendar year beginning after December 31,
1976, and before January 1, 1982, must file a gift tax return on Form
709 for any calendar quarter in which the sum of the taxable gifts made
during that calendar quarter, plus all other taxable gifts made during
the year (for which a return has not yet been required to be filed),
exceeds $25,000. If the aggregate transfers made in a calendar year
after 1976 and before 1982 that must be reported do not exceed $25,000,
only one return must be filed for the calendar year and it must be
filed by the due date for a fourth quarter gift tax return (April 15).
(c) Gifts made after December 31, 1970, and before January 1, 1977.
An individual citizen or resident of the United States who makes a
transfer by gift within any calendar year beginning after December 31,
1970, and before January 1, 1977, must file a gift tax return on Form
709 for the calendar quarter in which any portion of the value of the
gift, or any portion of the sum of the values of the gifts to such
donee during that calendar year, is not excluded from the total amount
of taxable gifts for that year, and must also make a return for any
subsequent quarter within the same taxable year in which any additional
gift is made to the same donee.
(d) Gifts by nonresident alien donors. The rules contained in
paragraphs (a) through (c) of this section also apply to a nonresident
not a citizen of the United States provided that, under section
2501(a)(1) and Sec. 25.2511-3, the transfer is subject to the gift tax.
(e) Miscellaneous provisions. Only individuals are required to file
returns and not trusts, estates, partnerships, or corporations.
Duplicate copies of the return are not required to be filed. See
Secs. 25.6075-1 and 25.6091-1 for the time and place for filing the
gift tax return. For delinquency penalties for failure to file or pay
the tax, see section 6651 and Sec. 301.6651-1 of this chapter
(Procedure and Administration Regulations). For criminal penalties for
failure to file a return and filing a false or fraudulent return, see
sections 7203, 7206, and 7207.
(f) Return required even if no tax due. The return is required even
though, because of the deduction authorized by section 2522 (charitable
deduction) or the unified credit under section 2505, no tax may be
payable on the transfer.
* * * * *
Par. 38. Section 25.6019-2 is revised to read as follows:
Sec. 25.6019-2 Returns required in case of consent under section 2513.
Except as otherwise provided in this section, the provisions of
Sec. 25.6019-1 (other than paragraph (d) of Sec. 25.6019-1) apply with
respect to the filing of a gift tax return or returns in the case of a
husband and wife who consent (see Sec. 25.2513-1) to the application of
section 2513. If both spouses are (without regard to the provisions of
section 2513) required under the provisions of Sec. 25.6019-1 to file
returns, returns must be filed by both spouses. If only one of the
consenting spouses is (without regard to the provisions of section
2513) required under Sec. 25.6019-1 to file a return, a return must be
filed by that spouse. In the latter case if, after giving effect to the
provisions of section 2513, the other spouse is considered to have made
a gift not excluded from the total amount of such other spouse's gifts
for the taxable year by reason of section 2503 (b) or (e) (relating,
respectively, to certain gifts of $10,000 per donee and the exclusion
for certain educational or medical expenses), a return must also be
filed by such other spouse. Thus, if during a calendar year beginning
after December 31, 1981, the first spouse made a gift of $18,000 to a
child (the gift not being either a future interest in property or an
amount excluded under section 2503(e)) and the other spouse made no
gifts, only the first spouse is required to file a return for that
calendar year. However, if the other spouse had made a gift in excess
of $2,000 to the same child during the same calendar year or if the
gift made by the first spouse had amounted to $21,000, each spouse
would be required to file a return if the consent is signified as
provided in section 2513.
Par. 39. Section 25.6019-3 is amended as follows:
a. The first sentence in paragraph (a) is revised.
b. The second sentence in paragraph (b) is revised.
c. The revisions read as follows:
Sec. 25.6019-3 Contents of return.
(a) In general. The return must set forth each gift made during the
calendar year (or calendar quarter with respect to gifts made after
December 31, 1970, and before January 1, 1982) that under sections 2511
through 2515 is to be included in computing taxable gifts; the
deductions claimed and allowable under sections 2521 through 2524; and
the taxable gifts made for each of the preceding reporting periods. * *
*
(b) * * * In any case where a husband and wife enter into a written
agreement of the type contemplated by section 2516 and the final decree
of divorce is not granted on or before the due date for the filing of a
gift tax return for the calendar year (or calendar quarter with respect
to periods beginning after December 31, 1970, and ending before January
1, 1982) in which the agreement became effective (see Sec. 25.6075-1),
then, except to the extent Sec. 25.6019-1 provides otherwise, the
transfer must be disclosed by the transferor upon a gift tax return
filed for the calendar year (or calendar quarter) in which the
agreement becomes effective, and a copy of the agreement must be
attached to the return. * * *
Par. 40. Section Sec. 25.6019-4 is amended by revising the first
sentence to read as follows:
Sec. 25.6019-4 Description of property listed in return.
The properties comprising the gifts made during the calendar year
(or calendar quarter with respect to gifts made after December 31,
1970, and before January 1, 1982) must be listed on the return and
described in a manner that they may be readily identified. * * *
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 41. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 42. Section 602.101(c) is amended by adding two entries in
numerical order in the table to read as follows:
Sec. 602.101 OMB Control numbers.
(c) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
*****
20.2056(b)-7............................................... 1545-0015
*****
25.2523(f)-1............................................... 1545-0015
*****
------------------------------------------------------------------------
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: January 7, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 94-3945 Filed 2-28-94; 8:45 am]
BILLING CODE 4830-01-U
