[Federal Register Volume 60, Number 162 (Tuesday, August 22, 1995)]
[Rules and Regulations]
[Pages 43554-43563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19866]
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DEPARTMENT OF THE TREASURY
26 CFR Part 20 and 602
[TD 8613]
RIN 1545-AS67
Requirements to Ensure Collection of Section 2056A Estate Tax
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations that provide
guidance relating to the additional requirements necessary to ensure
the collection of the estate tax imposed under section 2056A(b) with
respect to taxable events involving qualified domestic trusts (QDOTs)
described in section 2056A(a). The text of these temporary regulations
also serves as the text of the proposed regulations set forth in the
notice of proposed rulemaking on this subject in the Proposed Rules
section of this issue of the Federal Register.
DATES: These regulations are effective August 22, 1995.
These regulations apply to estates of decedents dying after March
7, 1996.
FOR FURTHER INFORMATION CONTACT: Susan Hurwitz (202) 622-3090 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These regulations are being issued without prior notice and public
procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).
For this reason, the collections of information contained in these
regulations have been reviewed and, pending receipt and evaluation of
public comments, approved by the Office of Management and Budget under
control number 1545-1443.
[[Page 43555]]
For further information concerning this collection of information,
and where to submit comments on the collections of information and the
accuracy of the estimated burden, and suggestions for reducing this
burden, please refer to the preamble to the cross-referencing notice of
proposed rulemaking published in the Proposed Rules section of this
issue of the Federal Register.
Background
This document contains amendments to the Estate Tax Regulations (26
CFR part 20) under section 2056A of the Internal Revenue Code of 1986
(Code). Section 2056A was added by section 5033 of the Technical and
Miscellaneous Revenue Act of 1988. These temporary regulations provide
additional requirements that must be satisfied in order for a trust to
qualify as a QDOT. The requirements are necessary to ensure the
collection of the section 2056A estate tax that is imposed upon any
distribution of principal from the QDOT, upon the death of the
surviving spouse, or if the trust ceases to qualify as a QDOT.
Explanation of Provisions
Section 2056A(a)(2) authorizes the Secretary to promulgate
regulations that will ensure the collection of the estate tax imposed
under section 2056A(b). In accordance with this grant of regulatory
authority, a notice of proposed rulemaking was published in the Federal
Register (58 FR 305), on January 5, 1993. The Service received written
comments on the proposed regulations and, on April 2, 1993, held a
public hearing on the regulations. After consideration of all written
and oral comments received, it was determined to issue these
regulations as temporary and proposed regulations in order to obtain
additional public comment with respect to the additional requirements
necessary to ensure collection of the section 2056A estate tax in view
of the significant number of changes made from the text of the proposed
regulations. The remainder of the proposed regulations under section
2056A have been adopted as final regulations in TD 8612.
Under Sec. 20.2056A-2(d)(1) of the proposed regulations, if the
fair market value of the assets of the QDOT at the death of the
decedent exceeds $2 million, the trust instrument must require that:
(1) At least one trustee be a bank as defined in section 581 or (2) the
trustee furnish a bond or security to the IRS in an amount equal to 65
percent of the fair market value of the trust corpus, determined as of
the date of the decedent's death. The proposed regulations further
provide that if the fair market value of the QDOT assets at the date of
the decedent's death is $2 million or less, the QDOT need not meet the
``bank'' or ``bond'' requirement if, as an alternative, the trust
instrument expressly provides that no more than 35 percent of the fair
market value of the trust assets, determined annually, may be invested
in real property that is not located in the United States.
Numerous comments were received regarding these additional
regulatory requirements for qualification as a QDOT. Several
commentators suggested that requiring the estate to post a bond or
appoint a bank as trustee in all cases where trust assets exceed $2
million imposed a burden on these trusts that was expensive and
unnecessary. These commentators indicated that the Service's interest
in ensuring collection of the section 2056A estate tax would be
adequately protected, regardless of the value of the QDOT assets, if
either a bank is acting as a trustee, the estate posts a bond, or the
trust instrument prohibits investment in foreign real property in
excess of the permissible limits. Thus, in the view of these
commentators, a trust consisting entirely of liquid assets, regardless
of value, would require no special security mechanisms to ensure
collection of the section 2056A estate tax (inasmuch as the QDOT would
not own any foreign real property). These recommendations have not been
adopted.
The temporary regulations generally retain the framework contained
in the proposed regulations. The legislative history underlying the
enactment of section 2056A expresses Congress' concerns regarding the
ability to collect the section 2056A estate tax and contains a clear
directive to require appropriate security mechanisms to ensure
collection. H.R. Rep. No. 795, 100th Cong. 2d Sess. 592 (July 26,
1988). Thus, the provisions in the proposed regulations requiring a
surety arrangement or a bank trustee if the trust is sufficiently
large, or contains significant foreign real property, have been
retained, because it is believed that these requirements best
effectuate the Congressional mandate. With respect to such QDOTs,
collection of the section 2056A estate tax can not be adequately
assured in the absence of special security measures. Further, it is
believed that the $2 million threshold for imposing additional security
requirements equitably balances the interests of the Government with
the financial constraints of smaller QDOTs.
However, many revisions have been made in the temporary regulations
that are intended to provide flexibility and guidance and to alleviate
any undue burden attributable to the special security requirements.
In response to comments that the bank trustee provision contained
in Sec. 20.2056A-2(d)(1)(i)(A) of the proposed regulations (requiring a
bank described in section 581 to act as the U.S. Trustee) discriminates
against foreign banks, the temporary regulations provide that a United
States branch of a foreign bank may satisfy the bank trustee
requirement, provided that the trust instrument names at least one
United States Trustee to serve as co-trustee of the QDOT at all times
during the administration of the QDOT.
Another commentator suggested that an individual attorney be
authorized to act as the U.S. Trustee in lieu of a United States bank
in order to satisfy the ``bank trustee'' requirement. The comment
reflects a historical practice in certain localities of an attorney
serving as professional trustee of substantial trusts with the backing
of the financial resources of the attorney's law firm. This alternative
proposal is not incorporated in the temporary regulations. Under the
procedures provided in Sec. 20.2056A-2T(d)(4), the IRS is considering
whether an arrangement may qualify as an alternate security arrangement
where an attorney (or firm) actively engaged in the administration of
estates and trusts acts as trustee and has individually, and with the
other members of the attorney's firm, sufficient assets under
management. During the period prior to the publication of guidance in
the Internal Revenue Bulletin regarding alternate plans or
arrangements, the IRS will accept letter ruling requests as to suitable
alternate arrangements.
Section 20.2056A-2(d)(2) of the proposed regulations provides that
if the U.S. Trustee is an individual United States citizen, the
individual must have a tax home, as defined in section 911(d)(3), in
the United States. Comments have been received suggesting that this
requirement should be deleted since many attorneys, executives, and
other individuals that would be willing to serve as the U.S. Trustee
are resident abroad in the conduct of their business. This change has
not been made. In order to assure collection of the section 2056A
estate tax, the U.S. Trustee must be subject to United States judicial
process at all times during the administration of the trust.
The sections of the proposed regulations discussing security
arrangements with respect to QDOTs in excess of $2 million have been
[[Page 43556]]
substantially modified in the temporary regulations. As noted above,
the proposed regulations provided for the posting of a bond as an
alternative to employing a bank as the QDOT U.S. Trustee. However, it
was recognized that in certain situations, because of statutory
restrictions and logistical concerns with monitoring cancellation of
the surety arrangement, other security arrangements might be more
desirable.
Accordingly, to address these concerns Sec. 20.2056A-2T(d)(1)(i)(C)
specifically authorizes letters of credit, in lieu of providing a bank
trustee or bond, as a permissible security arrangement. The letter of
credit may be issued by a bank described in section 581 or a U.S.
branch of a foreign bank. Alternatively, the letter of credit may be
issued by a foreign bank and confirmed by a bank described in section
581. Section 20.2056A-2T(d)(1)(i) (B) and (C) contain specific
guidelines outlining the terms of the bond and letter of credit
required, and provide a sample format for each. In general, the bond or
letter of credit must be for a term of at least one year and must be
automatically renewable at the expiration of the term, on an annual
basis thereafter, unless the IRS is notified at least 60 days prior to
the expiration of the term (including periods of automatic renewals)
that the security will not be renewed. The IRS will treat the notice of
failure to renew as a taxable event and draw on the instrument, unless
an alternative form of security is substituted.
Further, under the temporary regulations, if the bond or letter of
credit security arrangement is used, the QDOT must provide that if the
IRS draws on the bond or letter of credit, neither the U.S. Trustee nor
any other person will seek a return of the funds until after April 15th
of the following calendar year, the date the Form 706QDT reporting a
taxable event would ordinarily be due. This requirement is intended to
ensure that the IRS will be able to retain any funds drawn upon since,
after the due date of the return, the IRS would have the ability to
make a jeopardy assessment under section 6861, if appropriate. The IRS
is contemplating the development of internal procedures whereby the
taxpayer may request review of the IRS's decision to draw upon the bond
or letter of credit. In addition, prior to drawing on the bond or
letter of credit, the IRS will make every effort to contact the parties
to verify that the action is appropriate under the circumstances.
In addition, if the bond or letter of credit security arrangement
is employed, and if it is finally determined that the fair market value
of the QDOT assets is in excess of the value as originally reported on
the return, then the U.S. Trustee is accorded a reasonable period of
time to increase the bond or letter of credit to the requisite amount.
However, Sec. 20.2056A-2T(d)(1)(i)(D) provides that if the QDOT assets
are undervalued by 50 percent or more, the marital deduction will be
disallowed unless a good faith reasonable cause standard is satisfied.
This provision ensures that the QDOT will be adequately secured and
discourages egregious undervaluations of the QDOT assets. A similar
rule is provided in Sec. 20.2056A-2T(d)(1)(ii) with respect to the $2
million threshold for providing additional security arrangements.
Comments were received suggesting that, for purposes of determining
the $2 million threshold under Sec. 20.2056A-2(d)(1) of the proposed
regulations, the value of the surviving spouse's residence should be
excluded. It has also been suggested that the surviving spouse's
residence be excluded from both the bond and the foreign real property
requirements of the regulations. It is recognized that if a significant
portion of the trust value consists of the surviving spouse's principal
residence, an asset that will normally generate no income, the costs
associated with the posting of the bond, providing a letter of credit
or employing an institutional trustee to manage the trust's assets may
be burdensome. However, in cases involving any real property,
regardless of use, situated outside the United States, a significant
collection risk is presented in the absence of the additional security
measures required under the regulations.
Accordingly, Sec. 20.2056A-2T(d)(1)(iii) provides that the value
(measured at the decedent's death) attributable to the surviving
spouse's principal residence (within the meaning of section 1034)
wherever situated (and related furnishings), up to an aggregate value
of $600,000, may be excluded for purposes of determining if the $2
million threshold is exceeded. In addition, the temporary regulations
provide that the value of the principal residence (and related
furnishings), wherever situated, up to an aggregate value of $600,000,
may be excluded for purposes of determining the amount of the bond or
letter of credit (if required). However, the value of the principal
residence (and related furnishings) will continue to be included in
determining, with respect to QDOTs of less than $2 million, whether the
35 percent foreign real property threshold under Sec. 20.2056A-
2T(d)(1)(ii) has been exceeded.
Under Sec. 20.2056A-2T(d)(1)(iii), the term related furnishings
includes standard furniture and commonly included items such as
appliances, fixtures, decorative items, and china, that are not beyond
the value associated with normal household and decorative use. Rare
artwork, valuable antiques, and automobiles of any kind or class, are
not included within the meaning of this term. Further, the principal
residence exclusion ceases to apply if the property ceases to be used
as a principal residence, or the residence is sold and the ``adjusted
sales price'' (as defined in section 1034(b)(1)) is not reinvested
within twelve months thereafter in another principal residence. If the
principal residence exclusion applies, the U.S. Trustee must file an
annual statement as provided in Sec. 20.2056A-2T(d)(3). Upon cessation
of qualification for the exclusion, the U.S. Trustee must, within 120
days thereafter, bring the trust into full compliance with
Sec. 20.2056A-2T(d)(1) (i) or (ii), whichever is applicable (determined
as if the principal residence exclusion had not been applicable to the
estate).
Section 20.2056A-2T(d)(1)(ii) clarifies that the $2 million
threshold is determined without regard to any indebtedness with respect
to the assets comprising the QDOT. It is not necessary to know at the
time a QDOT agreement is executed whether the QDOT will exceed the $2
million threshold or whether the QDOT will be $2 million or less and
thus eligible to meet the 35 percent foreign real property requirement.
A QDOT agreement will satisfy the requirements of the temporary
regulations by stating the regulations' requirements in the alternative
and leaving the determination as to which requirements apply to the
particular QDOT to be determined at the date of death (or the alternate
valuation date, if applicable).
In response to comments, the look-through rule contained in
Sec. 20.2056A-2(d)(1)(ii)(B) of the proposed regulations has been
revised to apply only to trusts with less than $2 million in assets
that seek QDOT qualification by satisfying the 35 percent foreign real
property requirement, (as opposed to posting a bond or providing a
letter of credit, or utilizing a bank trustee). The look-through rule
will not apply if an alternative security arrangement is provided.
A comment was made that the look-through rule should only apply
when a QDOT that owns stock in a corporation with 15 or fewer
shareholders, or an interest in a partnership with 15 or fewer
partners, has a controlling interest
[[Page 43557]]
in the entity. This suggestion has not been adopted. The regulation
focuses on the number of shareholders or partners in the entity because
the fewer the number of shareholders or partners, the more likely that
the entity may be a family holding company created for the purpose of
avoiding the QDOT security rules. The control that the QDOT may be able
to exert over the entity is not the primary concern. However, a de
minimis rule is adopted to avoid application of the look-through rule
under certain circumstances. Accordingly, the temporary regulations
provide that the look-through rule only applies if the QDOT owns
(including interests that it is deemed to own) more than 20% of the
voting interest or value in the corporation or more than a 20% capital
interest in the partnership.
Comments were received that the anti-abuse rule contained in
Sec. 20.2056A-2(d)(1)(iii) of the proposed regulations was overly
broad. It has been determined that the breadth of the rule is necessary
to ensure collection of the tax and, therefore, the rule as proposed is
not modified.
Comments have been received recommending elimination of the rule
under Sec. 20.2056A-2(d)(3) of the proposed regulations, requiring that
personal property and written evidence of intangible personal property
must be physically located in the United States at all times during the
term of the QDOT. These comments noted that domestic brokerage
companies often provide for custody of foreign securities outside of
the United States to facilitate sale of the securities. This practice
would make it difficult, if not impossible, for QDOTs to comply with
the intangible personal property rule. In light of these comments, the
requirement that tangible and intangible personal property be located
in the United States has been deleted from the temporary regulations.
Section 20.2056A-2(d)(4) of the proposed regulations requires the
U.S. Trustee to file an annual statement with the IRS providing certain
information and summarizing the assets held by the QDOT and the fair
market value of each asset. Comments were received recommending that
the annual statement requirement should not apply if the bank or bond
requirement is satisfied. Additionally, the commentators recommended
that annual filing should be required only if the QDOT holds foreign
real property.
After fully considering these comments, it was determined that
modifications to the annual reporting requirement were warranted. Under
Sec. 20.2056A-2T(d)(3), the annual statement is required to be filed
only in cases where: (1) The QDOT directly (before application of the
look-through rule) owns foreign real property (unless the bank, bond,
or letter of credit security requirement is met); (2) the principal
residence exclusion applies, regardless of the situs of the residence
or whether the bank, bond, or letter of credit requirement is met; or
(3) after applying the look-through rule (as limited in application by
the temporary regulations), the QDOT is treated as owning any foreign
real property. Additional rules apply if the principal residence
exclusion ceases to apply or the residence is sold. In addition, the
temporary regulations have been modified to provide that the annual
statement is to be filed with the Form 706-QDT rather than with the
Form 1041 as provided in the proposed regulations. This change was
necessary because not all QDOTs are required to file Form 1041.
Comments have also been received recommending that the IRS provide
specific examples of acceptable alternate arrangements and situations
justifying a waiver under Sec. 20.2056A-2(d)(5) of the proposed
regulations. The IRS intends to provide guidance to be published in the
Internal Revenue Bulletin on this subject. As noted above, until such
guidance is published, the IRS will accept requests for letter rulings
on acceptable alternate arrangements.
In general, these regulations are effective with respect to estates
of decedents dying after the date that is 180 days after the date these
regulations are published in the Federal Register. In order for a trust
subject to these regulations to qualify as a QDOT, the trust must
contain the governing instrument requirements of Sec. 20.2056A-2T(d)(1)
(i) and (ii) at the time of death, or be reformed, pursuant to the
terms of the governing instrument, or judicially under section
2056(d)(5). However, in response to comments, special transitional
rules in the case of incompetency and in the case of certain
irrevocable trusts have been added pursuant to which a trust is deemed
to meet the governing instrument requirements of Sec. 20.2056A-2T(d)(1)
(i) and (ii) even though such requirements are not contained in the
governing instrument, providing certain requirements are met.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also 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. Pursuant to section 7805(f) of the Internal Revenue Code,
these temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regulations is Susan Hurwitz, Office
of Assistant Chief Counsel (Passthroughs and Special Industries).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 20
Estate taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 20 and 602 are amended as follows:
PART 20--ESTATE TAXES; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
Paragraph 1. The authority citation for part 20 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2056A-2T is added to read as follows:
Sec. 20.2056A-2T Requirements for qualified domestic trust
(temporary).
(a) through (c) [Reserved] For further guidance see Sec. 20.2056A-2
(a) through (c).
(d) Additional requirements to ensure collection of the section
2056A estate tax--(1) Security and other arrangements for payment of
estate tax imposed under section 2056A(b)(1)--(i) QDOTs with assets in
excess of $2 million. If the fair market value of the assets passing,
treated, or deemed to have passed to the QDOT (or in the form of a
QDOT), determined without reduction for any indebtedness with respect
to the assets, as finally determined for federal estate tax purposes,
exceeds $2 million as of the date of the decedent's death or, if
applicable, the alternate valuation date
[[Page 43558]]
(adjusted as provided in paragraph (d)(1)(iii) of this section), the
trust instrument must meet the requirements of either paragraph
(d)(1)(i) (A), (B), or (C) of this section at all times during the term
of the QDOT. The QDOT may alternate between any of the arrangements
provided in paragraphs (d)(1)(i) (A), (B), and (C) of this section
provided that, at any given time, at least one of the arrangements is
in effect.
(A) Bank Trustee. Except as otherwise provided in paragraph (d)(6)
(ii) or (iii) of this section, the trust instrument must require that
during the entire term of the QDOT, at least one U.S. Trustee be a
bank, as defined in section 581. Alternatively, the trust instrument
must, except as otherwise provided in paragraph (d)(6) (ii) or (iii) of
this section, require that during the entire term of the QDOT, at least
one trustee be a United States branch of a foreign bank, provided that
the trust instrument must also require that, during the entire term of
the QDOT, a U.S. Trustee act as a trustee with such foreign bank
trustee.
(B) Bond. Except as otherwise provided in paragraph (d)(6)(ii) or
(iii) of this section, the trust instrument must require that the U.S.
Trustee furnish a bond in favor of the Internal Revenue Service in an
amount equal to 65 percent of the fair market value of the trust assets
(without regard to any indebtedness thereon) as of the date of the
decedent's death (or alternate valuation date, if applicable), as
finally determined for federal estate tax purposes (and as further
adjusted as provided in paragraph (d)(1)(iii) of this section). If,
after examination of the estate tax return, the fair market value of
the trust assets, as originally reported on the estate tax return, is
adjusted (pursuant to a judicial proceeding or otherwise) resulting in
a final determination of the value of the assets as reported on the
return, the U.S. Trustee shall have a reasonable period of time (not
exceeding sixty days after the conclusion of the proceeding or other
action resulting in a final determination of the value of the assets)
to adjust the amount of the bond accordingly. But see, paragraph
(d)(1)(i)(D) of this section for a special rule in the case of a
substantial undervaluation of QDOT assets. Unless an alternate
arrangement under paragraph (d)(1)(i) (A), (B), or (C) of this section,
or an arrangement prescribed under paragraph (d)(4) of this section, is
provided, or the trust is otherwise no longer subject to the
requirements of section 2056A pursuant to section 2056A(b)(12), the
bond must remain in effect until the termination of the trust and the
payment of any tax liability finally determined to be due under section
2056A(b).
(1) Requirements with respect to the bond. The bond must be with a
satisfactory surety, as prescribed under section 7101 and
Sec. 301.7101-1 of this chapter (Regulations on Procedure and
Administration), and shall be subject to Internal Revenue Service
review as may be prescribed by the Commissioner. The bond may not be
cancelled. The bond must be for a term of at least one year and must be
automatically renewable at the end of such term, on an annual basis
thereafter, unless notice of failure to renew is received by the IRS at
least 60 days prior to the end of the term, including periods of
automatic extensions. Any notice of failure to renew must be sent to
the Estate and Gift Tax Group in the District Office of the Internal
Revenue Service that has examination jurisdiction over the decedent's
estate (Internal Revenue Service, District Director, [specify location]
District Office, Estate and Gift Tax Examination Group, [specify Street
Address, City, State, Zip Code]) (or in the case of noncitizen
decedents and United States citizens who die domiciled outside the
United States, Estate and Gift Tax Examination Group, Assistant
Commissioner (International), CP:IN:D:C:EX:HQ:1114, Washington, DC
20024). The Service will not draw on the bond if, within 30 days of
receipt of the notice of failure to renew, the U.S. Trustee notifies
the Service (at the same address to which notice of failure to renew is
to be sent) that an alternate arrangement under paragraphs
(d)(1)(i)(A), (B), or (C) of this section has been secured and that
such arrangement will take effect immediately prior to or upon
expiration of the bond.
(2) Form of bond. The bond must be in the following form (or in a
form that is the same as the following form in all material respects),
or in such alternative form as the Commissioner may prescribe by
guidance published in the Internal Revenue Bulletin (see
Sec. 601.601(d)(2) of this chapter):
Bond in Favor of the Internal Revenue Service To Secure Payment
of Section 2056A Estate Tax Imposed Under Section 2056A(b) of the
Internal Revenue Code.
KNOW ALL PERSONS BY THESE PRESENTS, That the undersigned,
____________, the SURETY, and ____________, the PRINCIPAL, are
irrevocably held and firmly bound to pay the Internal Revenue
Service upon written demand that amount of any tax up to $[amount
determined under paragraph (d)(1)(i)(B) of this section], imposed
under section 2056A(b)(1) of the Internal Revenue Code (including
penalties and interest on said tax) determined by the Internal
Revenue Service to be payable with respect to the principal as
trustee for: [Identify trust and governing instrument, name and
address of trustee], a qualified domestic trust as defined in
section 2056A(a) of the Internal Revenue Code, for the payment of
which the said Principal and said Surety, bind themselves, their
heirs, executors, administrators, successors and assigns, jointly
and severally, firmly by these presents.
WHEREAS, The Internal Revenue Service may demand payment under
this bond at any time if the Internal Revenue Service in its sole
discretion determines that a taxable event with respect to the trust
has occurred; the trust no longer qualifies as a qualified domestic
trust as described in section 2056A(a) of the Internal Revenue Code
and the regulations promulgated thereunder, or a distribution
subject to the tax imposed under section 2056A(b)(1) has been made.
Demand by the Internal Revenue Service for payment may be made
whether or not the tax and tax return (Form 706-QDT) with respect to
the taxable event is due at the time of such demand, or an
assessment has been made by the Internal Revenue Service with
respect to such tax.
NOW THEREFORE, The condition of this obligation is such that it
shall not be cancelled and, if payment of all tax liability finally
determined to be imposed under section 2056A(b) is made, then this
obligation shall be null and void; otherwise, this obligation is to
remain in full force and effect for one year from its effective date
and is to be automatically renewable on an annual basis unless, at
least 60 days prior to the expiration date, including periods of
automatic renewals, the surety notifies the Internal Revenue Service
by Registered or Certified Mail, return receipt requested, of such
failure to renew. Receipt of such notice of failure to renew may be
considered a taxable event unless an alternate security arrangement
is obtained by the trustee prior to the date of expiration and the
Trustee notifies the Internal Revenue Service of such alternate
security arrangement. The surety shall remain liable for all taxable
events occurring prior to the date of expiration. All notices
required under this instrument should be sent to District Director,
[specify location] District Office, Estate and Gift Tax Examination
Group, Street Address, City, State, Zip Code. (In the case of
nonresident noncitizen decedents and United States citizens who die
domiciled outside the United States, all notices should be sent to
Estate and Gift Tax Examination Group, Assistant Commissioner
(International), CP:IN:D:C:EX:HQ:1114, Washington, DC 20024).
This bond shall be effective as of ____________.
Principal--------------------------------------------------------------
Date-------------------------------------------------------------------
Surety-----------------------------------------------------------------
Date-------------------------------------------------------------------
(3) Additional governing instrument requirements. The trust
instrument must also provide that in the event the Internal Revenue
Service draws on the bond, in accordance with its terms, neither the
U.S. Trustee nor any other
[[Page 43559]]
person will seek a return of any part of the remittance until April
15th of the calendar year following the year in which the bond is drawn
upon. After such date, any such remittance will be treated as a deposit
and will be returned (without interest) upon request of the U.S.
Trustee, unless it is determined that assessment or collection of the
tax imposed by section 2056A(b)(1) is in jeopardy, within the meaning
of section 6861. If an assessment under section 6861 is made, the
remittance will first be credited to any tax liability reported on the
Form 706-QDT, then to any unpaid balance of a section 2056A(b)(1)(A)
tax liability (plus interest and penalties) for any prior taxable
years, and any balance will then be returned to the U.S. Trustee.
(4) Procedure. The bond is to be filed with the decedent's federal
estate tax return, Form 706 or 706NA (unless an extension for filing
the bond is granted under Sec. 301.9100 of this chapter. The U.S.
Trustee must provide a written statement with the bond that provides a
list of the assets that will be used to fund the QDOT and the
respective values of such assets. The written statement must also
indicate whether any exclusions under paragraph (d)(1)(iii) of this
section are claimed.
(C) Letter of credit. Except as otherwise provided in paragraph
(d)(6)(ii) or (iii) of this section, the trust instrument must require
that the U.S. Trustee furnish an irrevocable letter of credit issued by
a bank, as defined in section 581, issued by a United States branch of
a foreign bank, or issued by a foreign bank and confirmed by a bank as
defined in section 581, in an amount equal to 65 percent of the fair
market value of the trust assets (without regard to any indebtedness
thereon) as of the date of the decedent's death (or alternate valuation
date, if applicable), as finally determined for federal estate tax
purposes (and as further adjusted as provided in paragraph (d)(1)(iii)
of this section). If, after examination of the estate tax return, the
fair market value of the trust assets, as originally reported on the
estate tax return, is adjusted (pursuant to a judicial proceeding or
otherwise) resulting in a final determination of the value of the
assets as reported on the return, the U.S. Trustee shall have a
reasonable period of time (not exceeding 60 days after the conclusion
of the proceeding or other action resulting in a final determination of
the value of the assets) to adjust the amount of the letter of credit
accordingly. But see, paragraph (d)(1)(i)(D) of this section for a
special rule in the case of a substantial undervaluation of QDOT
assets. Unless an alternate arrangement under paragraph (d)(1)(i) (A),
(B), or (C) of this section, or an arrangement prescribed under
paragraph (d)(4)of this section, is provided, or the trust is otherwise
no longer subject to the requirements of section 2056A pursuant to
section 2056A(b)(12), the letter of credit must remain in effect until
the termination of the trust and the payment of any tax liability
finally determined to be due under section 2056A(b).
(1) Requirements with respect to letter of credit. The letter of
credit shall be irrevocable and provide for sight payment. The letter
of credit must be for a term of at least one year and must be
automatically renewable at the end of such term, at least on an annual
basis, unless notice of failure to renew is received by the Internal
Revenue Service at least sixty days prior to the end of the term,
including periods of automatic renewals. If the letter of credit is
issued by the U.S. branch of a foreign bank and such U.S. branch is
closing, the branch (or foreign bank) must notify the Internal Revenue
Service of such closure and the notice of closure must be received at
least 60 days prior to the date of closure. Any notice of failure to
renew or closure of a U.S. branch of a foreign bank must be sent to the
Estate and Gift Tax Group in the District Office of the Internal
Revenue Service that has examination jurisdiction over the decedent's
estate (Internal Revenue Service, District Director, (specify location)
District Office, Estate and Gift Tax Examination Group, [Street
Address, City State, Zip Code]) (or in the case of noncitizen decedents
and United States citizens who die domiciled outside the United States,
Estate and Gift Tax Examination Group, Assistant Commissioner
(International), CP:IN:D:C:EX:HQ:1114, Washington, DC 20024). The
Internal Revenue Service will not draw on the letter of credit if,
within 30 days of receipt of the notice of failure to renew or closure
of the U.S. branch of a foreign bank, the U.S. Trustee notifies the
Service (at the same address to which notice is to be sent) that an
alternate arrangement under paragraph(d)(1)(i) (A), (B), or (C) of this
section has been secured and that such arrangement will take effect
immediately prior to or upon expiration of the letter of credit or
closure of the U.S. branch of the foreign bank.
(2) Form of letter of credit. The letter of credit shall be made in
the following form (or in a form that is the same as the following form
in all material respects), or such alternative form as the Commissioner
may prescribe by guidance published in the Internal Revenue Bulletin
(see Sec. 601.601(d)(2) of this chapter):
[Issue Date]
To: Internal Revenue Service
Attention: District Director, [specify location] District Office
Estate and Gift Tax Examination Group [Street Address, City, State,
ZIP Code]
[Or in the case of nonresident noncitizen decedents and United
States citizens who die domiciled outside the United States,
To: Estate and Gift Tax Examination Group, Assistant Commissioner
(International) CP:IN:D:C:EX:HQ:1114 Washington, DC 20024].
Dear Sirs: We hereby establish our irrevocable Letter of Credit
No. ________in your favor for drawings up to U.S. Sec. [Applicant
should provide bank with amount which Applicant determined under
paragraph (d)(1)(i)(C)] effective immediately. This Letter of Credit
is issued, presentable and payable at our office at
____________________ and expires at 3:00 p.m. [EDT, EST, CDT, CST,
MDT, MST, PDT, PST] on ____________ at said office.
For information and reference only, we are informed that this
Letter of Credit relates to [Applicant should provide bank with the
identity of qualified domestic trust and governing instrument], and
the name, address, and identifying number of the trustee is
[Applicant should provide bank with the trustee name, address and
the QDOT's TIN number, if any].
Drawings on this Letter of Credit are available upon
presentation of the following documents:
1. Your draft drawn at sight on us bearing our Letter of Credit
No. ________; and
2. Your signed statement as follows:
The amount of the accompanying draft is payable under [identify
bank] irrevocable Letter of Credit No. ________ pursuant to section
2056A of the Internal Revenue Code and the regulations promulgated
thereunder, because the Internal Revenue Service in its sole
discretion has determined that a ``taxable event'' with respect to
the trust has occurred; e.g., the trust no longer qualifies as a
qualified domestic trust as described in section 2056A of the
Internal Revenue Code and regulations promulgated thereunder, or a
distribution subject to the tax imposed under section 2056A(b)(1) of
the Internal Revenue Code has been made.
Except as expressly stated herein, this undertaking is not
subject to any agreement, requirement or qualification. The
obligation of [Name of Issuing Bank] under this Letter of Credit is
the individual obligation of [Name of Issuing Bank] and is in no way
contingent upon reimbursement with respect thereto.
It is a condition of this Letter of Credit that it is deemed to
be automatically extended without amendment for a period of one year
from the expiry date hereof, or any future expiration date, unless
at least 60 days prior to any expiration date, we send to you notice
by Registered Mail or Certified Mail, return receipt requested, or
by courier to your address indicated above, that we elect not to
consider this Letter of Credit renewed for any
[[Page 43560]]
such additional period. Upon receipt of such notice, you may draw
hereunder on or before the then current expiration date, by
presentation of your draft and statement as stipulated above.
In the case of a letter of credit issued by a U.S. branch of a
foreign bank the following language must be added]. It is a further
condition of this Letter of Credit that if the U.S. branch of [name
of foreign bank] is to be closed, that at least sixty days prior to
such closing, we send you notice by Registered Mail or Certified
Mail, return receipt requested, or by courier to your address
indicated above, that this branch will be closing. Such notice will
specify the actual date of closing. Upon receipt of such notice, you
may draw hereunder on or before the date of closure, by presentation
of your draft and statement as stipulated above.
Except where otherwise stated herein, this Letter of Credit is
subject to the Uniform Customs and Practice for Documentary Credits,
1993 Revision, ICC Publication No. 500. If we notify you of our
election not to consider this Letter of Credit renewed and the
expiration date occurs during an interruption of business described
in Article 17 of said Publication 500, unless you had consented to
cancellation prior to the expiration date, the bank hereby
specifically agrees to effect payment if this Letter of Credit is
drawn against within 30 days after the resumption of business.
Except as stated herein, this Letter of Credit cannot be
modified or revoked without your consent.
Authorized Signature---------------------------------------------------
Date-------------------------------------------------------------------
(3) Form of confirmation. If the requirements of this paragraph
(d)(1)(i)(C) are satisfied by the issuance of a letter of credit by a
foreign bank confirmed by a bank as defined in section 581, the
confirmation shall be made in the following form (or in a form that is
the same as the following form in all material respects), or such
alternative form as the Commissioner may prescribe by guidance
published in the Internal Revenue Bulletin:
[Issue Date]
To: Internal Revenue Service
Attention: District Director, [specify location] District
Office, Estate and Gift Tax Examination Group [State Address, City,
State, ZIP Code]
[or in the case of nonresident noncitizen decedents and United
States citizens who die domiciled outside the United States,
To: Estate and Gift Tax Examination Group, Assistant Commissioner
(International) CP:IN:D:C:EX:HQ:1114 Washington, DC 20024].
Dear Sirs: We hereby confirm the enclosed irrevocable Letter of
Credit No. ________, and amendments thereto, if any, in your favor
by ____________________ [Issuing Bank] for drawings up to U.S.
$________ [same amount as in initial Letter of Credit] effective
immediately. This confirmation is issued, presentable and payable at
our office at ____________ and expires at 3:00 p.m. [EDT, EST, CDT,
CST, MDT, MST, PDT, PST] on ____________ at said office.
For information and reference only, we are informed that this
Confirmation relates to [Applicant should provide bank with the
identity of qualified domestic trust and governing instrument], and
the name, address, and identifying number of the trustee is
[Applicant should provide bank with the trustee name, address and
the QDOT's TIN number, if any].
We hereby undertake to honor your sight draft(s) drawn as
specified in the Letter of Credit.
Except as expressly stated herein, this undertaking is not
subject to any agreement, condition or qualification. The obligation
of [Name of Confirming Bank] under this Confirmation is the
individual obligation of [Name of Confirming Bank] and is in no way
contingent upon reimbursement with respect thereto.
It is a condition of this Confirmation that it is deemed to be
automatically extended without amendment for a period of one year
from the expiry date hereof, or any future expiration date, unless
at least sixty days prior to any expiration date, we send to you
notice by Registered Mail or Certified Mail, return receipt
requested, or by courier to your address indicated above, that we
elect not to consider this Confirmation renewed for any such
additional period. Upon receipt of such notice, you may draw
hereunder on or before the then current expiration date, by
presentation of your draft and statement as stipulated above.
Except where otherwise stated herein, this Confirmation is
subject to the Uniform Customs and Practice for Documentary Credits,
1993 Revision, ICC Publication No. 500. If we notify you of our
election not to consider this Confirmation renewed and the
expiration date occurs during an interruption of business described
in Article 17 of said Publication 500, unless you had consented to
cancellation prior to the expiration date, the bank hereby
specifically agrees to effect payment if this Confirmation is drawn
against within 30 days after the resumption of business.
Except as stated herein, this Confirmation cannot be modified or
revoked without your consent.
Authorized Signature---------------------------------------------------
Date-------------------------------------------------------------------
(4) Additional governing instrument requirements. The trust
instrument must also provide that in the event that the Internal
Revenue Service draws on the letter of credit (or confirmation) in
accordance with its terms, neither the U.S. Trustee nor any other
person will seek a return of any part of the remittance until April
15th of the calendar year following the year in which the letter of
credit (or confirmation) is drawn upon. After such date, any such
remittance will be treated as a deposit and will be returned (without
interest) upon request of the U.S. Trustee after the date specified
above, unless it is determined that assessment or collection of the tax
imposed by section 2056A(b)(1) is in jeopardy, within the meaning of
section 6861. If an assessment under section 6861 is made, the
remittance will first be credited to any tax liability reported on the
Form 706-QDT, then to any unpaid balance of a section 2056A(b)(1)(A)
tax liability (plus interest and penalties) for any prior taxable
years, and any balance will then be returned to the U.S. Trustee.
(5) Procedure. The letter of credit (and confirmation, if
applicable) is to be filed with the decedent's federal estate tax
return, Form 706 or 706NA (unless an extension for filing the letter of
credit is granted under Sec. 301.9100 of this chapter). The U.S.
Trustee must provide a written statement with the letter of credit that
provides a list of the assets that will be used to fund the QDOT and
the respective values of such assets. The written statement must also
indicate whether any exclusions under paragraph (d)(1)(iii) of this
section are claimed.
(D) Disallowance of marital deduction in case of substantial
undervaluation of QDOT property in certain situations. (1) If either--
(i) The bond or letter of credit security arrangement under
paragraph (d)(1)(i) (B) or (C) of this section is chosen by the U.S.
Trustee; or
(ii) The QDOT property as originally reported on the decedent's
estate tax return is valued at $2 million or less but, as finally
determined for federal estate tax purposes, the QDOT property is
determined to be in excess of $2 million, then the marital deduction
will be disallowed in its entirety for failure to comply with the
requirements of section 2056A if the value of the QDOT property
reported on the estate tax return is 50 percent or less of the amount
finally determined to be the correct value of such property for federal
estate tax purposes.
(2) The preceding sentence shall not apply if--
(i) There was reasonable cause for such undervaluation; and
(ii) The fiduciary of the estate acted in good faith with respect
to such undervaluation. For this purpose, Sec. 1.6664-4(b) of this
chapter applies, to the extent applicable, with respect to the facts
and circumstances to be taken into account in making this
determination.
(ii) QDOTs with assets of $2 million or less. If the fair market
value of the assets passing, treated, or deemed to have passed to the
QDOT (or in the form of a QDOT), determined without reduction for any
indebtedness with respect to the assets, as finally
[[Page 43561]]
determined for federal estate tax purposes, is $2 million or less as of
the date of the decedent's death or, if applicable, the alternate
valuation date (adjusted as provided in paragraph (d)(1)(iii) of this
section), the trust instrument must require that no more than 35
percent of the fair market value of the trust assets, determined
annually on the last day of the taxable year of the trust (or on the
last day of the calendar year if the QDOT does not have a taxable
year), may consist of real property located outside of the United
States, or the trust must meet the requirements prescribed by paragraph
(d)(1)(i) (A), (B), or (C) of this section. See paragraph (d)(1)(ii)(D)
of this section for special rules in the case of principal
distributions from a QDOT and fluctuations in the value of the foreign
real property held by a QDOT due to changes in value of foreign
currency. See paragraph (d)(1)(iii) of this section for a special rule
for principal residences. If the fair market value, as originally
reported on the decedent's estate tax return, of the assets passing or
deemed to have passed to the QDOT (determined without reduction for any
indebtedness with respect to the assets) is $2 million or less, but the
fair market value of the assets as finally determined for federal
estate tax purposes is more than $2 million, the U.S. Trustee shall
have a reasonable period of time (not exceeding sixty days after the
conclusion of the proceeding or other action resulting in a final
determination of the value of the assets) to meet the requirements
prescribed by paragraph (d)(1)(i) (A), (B), or (C) of this section.
However, see paragraph (d)(1)(i)(D) of this section in the case of a
substantial undervaluation of QDOT assets.
(A) Multiple QDOTs. For purposes of this paragraph (d)(1)(ii), if
more than one QDOT is established for the benefit of the surviving
spouse, the fair market value of all the QDOTs are aggregated in
determining whether the $2 million threshold under this paragraph
(d)(1)(ii) is exceeded.
(B) Look-through rule. For purposes of determining whether no more
than 35 percent of the fair market value of the QDOT assets consists of
foreign real property, if the QDOT owns more than 20% of the voting
stock or value in a corporation with 15 or fewer shareholders, or more
than 20% of the capital interest of a partnership with 15 or fewer
partners, then all assets owned by the corporation or partnership are
deemed to be owned directly by the QDOT to the extent of the QDOT's pro
rata share of the assets of that corporation or partnership. In the
case of a partnership, the QDOT partner's pro rata share shall be based
on the greater of its interest in the capital or profits of the
partnership. For purposes of this paragraph, all stock in the
corporation, or interests in the partnership, as the case may be, owned
by or held for the benefit of the surviving spouse, or any members of
the surviving spouse's family (within the meaning of section
267(c)(4)), are treated as owned by the QDOT solely for purposes of
determining the number of partners or shareholders in the entity and
the QDOT's percentage voting interest or value in the corporation or
capital interest in the partnership, but not for the purpose of
determining the QDOT's pro rata share of the assets of the entity.
(C) Interests in other entities. Interests owned by the QDOT in
other entities (such as an interest in a trust) are accorded treatment
consistent with that described in paragraph (d)(1)(ii)(B) of this
section.
(D) Special rule for foreign real property. For purposes of this
paragraph (d)(1)(ii), if, on the last day of any taxable year during
the term of the QDOT (or the last day of the calendar year if the QDOT
does not have a taxable year), the value of foreign real property owned
by the QDOT exceeds 35 percent of the fair market value of the trust
assets due to distributions of QDOT principal during that year or
because of fluctuations in the value of the foreign currency in the
jurisdiction where the real estate is located, the QDOT will not be
treated as failing to meet the requirements of paragraph (d)(1) of this
section and, therefore, will not cease to be a QDOT within the meaning
of Sec. 20.2056A-5(b)(3) if, by the end of the taxable year (or the
last day of the calendar year if the QDOT does not have a taxable year)
of the QDOT immediately following the year in which the 35 percent
limit was exceeded, the value of the foreign real property held by the
QDOT does not exceed 35 percent of the fair market value of the trust
assets or, alternatively, the QDOT meets the requirements of either
paragraph (d)(1)(i) (A), (B), or (C) of this section on or before the
close of that succeeding year.
(iii) Special rules for principal residence and related personal
effects--(A) Two million dollar threshold. For purposes of determining
whether the $2 million threshold under paragraphs (d)(1) (i) and (ii)
of this section has been exceeded, the executor of the estate may elect
to exclude up to $600,000 in value attributable to real property
wherever situated (and related furnishings) owned directly by the QDOT
that is used by the surviving spouse as the spouse's principal
residence and that passes, or is treated as passing, to the QDOT under
section 2056(d). The election is made by attaching a written statement
claiming the exclusion to the estate tax return on which the QDOT
election is made.
(B) Security requirement. For purposes of determining the amount of
the bond or letter of credit required in cases where paragraph
(d)(1)(i) (B) or (C) of this section applies, the executor of the
estate may elect to exclude, during the term of the QDOT, up to
$600,000 in value attributable to real property, wherever situated (and
related furnishings) owned directly by the QDOT that is used by the
surviving spouse as the spouse's principal residence and that passes,
or is treated as passing, to the QDOT under section 2056(d). The
election may be made regardless of whether the real property is
situated within or without the United States. The election is made by
attaching to the estate tax return on which the QDOT election is made a
written statement claiming the exclusion.
(C) Foreign real property limitation. The special rules of this
paragraph (d)(1)(iii) do not apply for purposes of determining whether
more than 35 percent of the QDOT assets consist of foreign real
property under paragraph (d)(1)(ii) of this section.
(D) Principal residence. For purposes of this paragraph
(d)(1)(iii), the term principal residence has the same meaning as
prescribed in section 1034 and the regulations thereunder. A principal
residence may include appurtenant structures used by the surviving
spouse for residential purposes and adjacent land not in excess of that
which is reasonably appropriate for residential purposes (taking into
account the residence's size and location).
(E) Related furnishings. The term related furnishings means
furniture and commonly included items such as appliances, fixtures,
decorative items and china, that are not beyond the value associated
with normal household and decorative use. Rare artwork, valuable
antiques, and automobiles of any kind or class are not within the
meaning of this term.
(F) Annual statement. If one or both of the exclusions provided in
paragraph (d)(1)(iii) (A) or (B) of this section are elected by the
executor of the estate, the U.S. Trustee must file the statement
required under paragraph (d)(3) of this section at the time and in the
manner provided in paragraph (d)(3) of this section. In addition, an
annual statement must be filed by the U.S. Trustee under the
circumstances
[[Page 43562]]
described in paragraphs (d)(3)(iii) (C) and (D) of this section.
(G) Cessation of use. Except as provided in this paragraph
(d)(1)(iii)(G), if the residence ceases to be used as the principal
residence of the spouse, or if the residence is sold during the term of
the QDOT, the exclusions provided in paragraph (d)(1)(iii) (A) and (B)
of this section will cease to apply. However, in the case of such a
sale, the exclusions will continue to apply if, within 12 months of the
date of sale, the amount of the adjusted sales price (as defined in
section 1034(b)(1)) is used to purchase a new principal residence for
the spouse. If less than the amount of the adjusted sales price is so
reinvested, then the amount of the exclusions initially claimed by the
QDOT are reduced proportionately based on the amount of excess adjusted
sales price not so reinvested compared to the entire adjusted sales
price. If the QDOT ceases to qualify for all or any portion of the
initially claimed exclusions, paragraph (d)(1)(i) of this section, if
applicable (determined as if the portion of the exclusions disallowed
had not been initially claimed by the QDOT), must be complied with no
later than 120 days after the effective date of the cessation. The
Internal Revenue Service may provide in guidance published in the
Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter) for
appropriate exceptions to the cessation of use rule contained in this
paragraph (d)(1)(iii) where the principal residence of a surviving
spouse is substituted for another principal residence, when both
residences are held in a QDOT.
(iv) Anti-abuse rule. Regardless of whether the QDOT designates a
bank as the U.S. Trustee under paragraph (d)(1)(i)(A) of this section
(or otherwise complies with paragraph (d)(1)(i)(A) of this section by
naming a foreign bank with a United States branch as a trustee to serve
with the U.S. Trustee), complies with paragraph (d)(1)(i) (B) or (C) of
this section, or is subject to and complies with the foreign real
property requirements of paragraph (d)(1)(ii) of this section, the
trust immediately ceases to qualify as a QDOT if the trust utilizes any
device or arrangement that has, as a principal purpose, the avoidance
of liability for the estate tax imposed under section 2056A(b)(1), or
the prevention of the collection of the tax. For example, the trust may
become subject to this paragraph (d)(1)(iv) if the U.S. Trustee that is
selected is a domestic corporation established with insubstantial
capitalization by the surviving spouse or members of the spouse's
family.
(2) Individual trustees. If the U.S. Trustee is an individual
United States citizen, the individual must have a tax home (as defined
in section 911(d)(3)) in the United States.
(3) Annual reporting requirements--(i) In general. The U.S. Trustee
must file a written statement described in paragraph (d)(3)(iii) of
this section, if the QDOT satisfies any one of the following criteria
for the applicable reporting years--
(A) The QDOT directly owns any foreign real property on the last
day of its taxable year (or the last day of the calendar year if it has
no taxable year), and the QDOT does not satisfy the requirements of
paragraph (d)(1)(i) (A), (B), or (C) of this section by employing a
bank as trustee or providing security; or
(B) The principal residence exclusion under paragraph (d)(1)(iii)
of this section applies during the taxable year (or during the calendar
year if the QDOT has no taxable year); or
(C) The principal residence previously subject to the exclusion
under paragraph (d)(1)(iii) of this section is sold, or that principal
residence ceases to be used as a principal residence, during the
taxable year (or during the calendar year if the QDOT does not have a
taxable year); or
(D) After the application of the look-through rule contained in
paragraph (d)(1)(ii)(B) of this section, the QDOT is treated as owning
any foreign real property on the last day of the taxable year (or the
last day of the calendar year if the QDOT has no taxable year).
(ii) Time and manner of filing. The written statement, containing
the information described in paragraph (d)(3)(iii) of this section, is
to be filed for the taxable year of the QDOT (calendar year if the QDOT
does not have a taxable year) for which any of the events or conditions
requiring the filing of a statement under paragraph (d)(3)(i) of this
section have occurred or have been satisfied. The written statement is
to be submitted to the Internal Revenue Service by filing a Form 706-
QDT, with the statement attached, no later than April 15th of the
calendar year following the calendar year in which or with which the
taxable year of the QDOT ends (or by April 15th of the following year
if the QDOT has no taxable year), unless an extension of time is
obtained under Sec. 20.2056A-11(a). The Form 706-QDT, with attached
statement, must be filed regardless of whether the Form 706-QDT is
otherwise required to be filed under the provisions of this chapter.
Failure to file timely the statement may subject the QDOT to the rules
of paragraph (d)(1)(iv) of this section.
(iii) Contents of statement. The written statement must contain the
following information--
(A) The name, address, and taxpayer identification number, if any,
of the U.S. Trustee and the QDOT; and
(B) A list summarizing the assets held by the QDOT, together with
the fair market value of each listed QDOT asset, determined as of the
last day of the taxable year (December 31 if the QDOT does not have a
taxable year) for which the written statement is filed. If the look-
through rule contained in paragraph (d)(1)(ii)(B) of this section
applies, then the partnership, corporation, trust or other entity must
be identified and the QDOT's pro rata share of the foreign real
property and other assets owned by that entity must be listed on the
statement as if directly owned by the QDOT; and
(C) If a principal residence previously subject to the exclusion
under paragraph (d)(1)(iii) of this section is sold during the taxable
year (or during the calendar year if the QDOT does not have a taxable
year), the statement must provide the date of sale, the adjusted sales
price (as defined in section 1034(b)(1)), the extent to which the
amount of the adjusted sales price has been or will be used to purchase
a new principal residence and, if not timely reinvested, the steps that
will or have been taken to comply with paragraph (d)(1)(i) of this
section, if applicable; and
(D) If the principal residence ceases to be used as a principal
residence by the surviving spouse during the taxable year (or during
the calendar year if the QDOT does not have a taxable year), the
written statement must describe the steps that will or have been taken
to comply with paragraph (d)(1)(i) of this section, if applicable.
(4) Request for alternate arrangement or waiver. If the
Commissioner provides guidance published in the Internal Revenue
Bulletin (see Sec. 601.601(d)(2) of this chapter) pursuant to which a
testator, executor, or the U.S. Trustee may adopt an alternate plan or
arrangement to assure collection of the section 2056A estate tax, and
if such an alternate plan or arrangement is adopted in accordance with
such published guidance, then the QDOT will be treated, subject to
paragraph (d)(1)(iv) of this section, as meeting the requirements of
paragraph (d)(1) of this section. Until such guidance is published in
the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter),
taxpayers may submit a request for a private letter ruling for the
[[Page 43563]]
approval of an alternate plan or arrangement proposed to be adopted to
assure collection of the section 2056A estate tax in lieu of the
requirements prescribed in this paragraph (d)(4).
(5) Adjustment of dollar threshold and exclusion. The Commissioner
may increase or decrease the dollar amounts referred to in paragraph
(d)(1) (i), (ii) or (iii) of this section in accordance with guidance
published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of
this chapter).
(6) Effective date and special rules. (i) This paragraph (d) is
effective for estates of decedents dying after March 7, 1996.
(ii) Special rule in the case of incompetency. A revocable trust or
a trust created under the terms of a will is deemed to meet the
governing instrument requirements of this paragraph (d) notwithstanding
that such requirements are not contained in the governing instrument,
if the trust instrument (or will) was executed on or before November
20, 1995, and--
(A) The testator or settlor dies after March 7, 1996;
(B) The testator or settlor is, on November 20, 1995, and at all
times thereafter, under a legal disability to amend the will or trust
instrument;
(C) The will or trust instrument does not provide the executor or
the U.S. Trustee with a power to amend the instrument in order to meet
the requirements of section 2056A; and
(D) The U.S. Trustee provides a written statement with the federal
estate tax return (Form 706 or 706NA) that the trust is being
administered (or will be administered) so as to be in actual compliance
with the requirements of this paragraph (d) and will continue to be
administered so as to be in actual compliance with this paragraph (d)
for the duration of the trust. This statement must be binding on all
successor trustees.
(iii) Special rule in the case of certain irrevocable trusts. An
irrevocable trust is deemed to meet the governing instrument
requirements of this paragraph (d) notwithstanding that such
requirements are not contained in the governing instrument if the trust
was executed on or before November 20, 1995, and:
(A) The settlor dies after March 7, 1996;
(B) The trust instrument does not provide the U.S. Trustee with a
power to amend the trust instrument in order to meet the requirements
of section 2056A; and
(C) The U.S. Trustee provides a written statement with the
decedent's federal estate tax return (Form 706 or 706NA) that the trust
is being administered in actual compliance with the requirements of
this paragraph (d) and will continue to be administered so as to be in
actual compliance with this paragraph (d) for the duration of the
trust. This statement must be binding on all successor trustees.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 3. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
Par. 4. Section 602.101(c) is amended by adding the entry
``20.2056A-2T(d)--1545-1443'' in numerical order in the table.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 21, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-19866 Filed 8-21-95; 8:45 am]
BILLING CODE 4830-01-U