[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