[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]


=======================================================================
-----------------------------------------------------------------------

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.

-----------------------------------------------------------------------

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