[Federal Register Volume 60, Number 162 (Tuesday, August 22, 1995)]
[Rules and Regulations]
[Pages 43531-43554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19867]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, 25 and 602

[TD 8612]
RIN 1455-AM85


Income, Gift and Estate Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
income tax imposed under chapter 1, the estate tax imposed under 
chapter 11, and the gift tax imposed under chapters 12 and 14 of the 
Internal Revenue Code of 1986. Changes to the marital deduction 
provisions of the estate and gift tax chapters were made by the 
Technical and Miscellaneous Revenue Act of 1988. Further amendments 
were made by the Revenue Reconciliation Act of 1989, and the Revenue 
Reconciliation Act of 1990. These final regulations will provide 
guidance needed to comply with the changes to the marital deduction 
provisions of the estate and gift tax chapters.

DATES: These regulations are effective August 22, 1995.
    These regulations apply to decedents dying and to gifts made after 
August 22, 1995.

FOR FURTHER INFORMATION CONTACT: Susan B. Hurwitz, 202-622-3090, not a 
toll-free number.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) 
under control number 1545-1360. The estimated annual burden per 
respondent/recordkeeper varies from 30 minutes to 3 hours, depending on 
individual circumstances, with an estimated average of 2 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer PC:FP, Washington, 
DC 20224, and to the Office of Management and Budget, Attention: Desk 
Officer for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Washington, DC 20503.

Background

    A notice of proposed rulemaking was published in the Federal 
Register (58 FR 305), on January 5, 1993, reflecting amendments made to 
the Code by the Technical and Miscellaneous Revenue Act of 1988 (Pub. 
L. 100-647) (the 1988 Act), the Revenue Reconciliation Act of 1989 
(Pub. L. 101-239) (the 1989 Act), and the Revenue Reconciliation Act of 
1990 (Pub. L. 101-508) (the 1990 Act). The 1988, 1989, and 1990 Acts 
impose restrictions on the allowance of the estate and gift tax marital 
deduction where the surviving spouse (in the case of a transfer at 
death) or the donee spouse (in the case of a lifetime transfer) is not 
a citizen of the United States. In addition, the gift tax annual 
exclusion allowable in the case of a transfer to a 

[[Page 43532]]
noncitizen spouse was increased to $100,000. The statutory amendments 
also changed the tax rate and the amount of the unified credit 
applicable in the case of the estate of a decedent nonresident not a 
citizen of the United States (nonresident alien). The IRS received 
written comments on the proposed regulations and, on April 2, 1993, 
held a public hearing on the regulations.
    After consideration of the written and oral comments received, 
Sec. 20.2056A-2(d) of the proposed regulations, which provides 
additional requirements for qualification as a qualified domestic trust 
to ensure the collection of the section 2056A estate tax, was 
substantially modified. In view of these substantial modifications, 
Sec. 20.2056A-2(d) has been reissued as proposed and temporary 
regulations in order to afford the public a further opportunity to 
comment on these security arrangements. See the proposed rules and the 
rules portion of this issue of the Federal Register, respectively. The 
balance of the proposed regulations are revised and adopted as final 
regulations by this Treasury decision.
    The following is a discussion of the more significant comments 
received (other than those comments pertaining to Sec. 20.2056A-2(d) of 
the proposed regulations) and the reasons for accepting or rejecting 
those comments in the final regulations.
A. Section 1.1015-5  Increased Basis for Gift Tax Paid in the Case of 
Gifts Made After December 31, 1976

    This section of the proposed regulations has been revised to better 
conform to the existing regulations and to clarify the determination of 
the amount of the gift tax paid in situations where the donor's unified 
credit is applied against the gift tax liability.

B. Section 20.2056A-1  Restrictions on Allowance of Marital Deduction 
if Surviving Spouse is Not a United States Citizen

    Under section 2056(d)(4), if the surviving spouse becomes a citizen 
of the United States before the day on which the estate tax return is 
filed, property passing from the decedent to the surviving spouse 
either outright or in trust need not be transferred to a qualified 
domestic trust (QDOT) (or the trust need not be reformed to qualify as 
a QDOT) in order to qualify for the estate tax marital deduction. It is 
possible that the naturalization process may not be completed before 
the due date, including extensions, for filing the estate tax return. 
Comments suggested that if the surviving spouse has filed an 
application for naturalization within a reasonable time after the 
decedent's death, then any late filing of the return pending the 
outcome of the citizenship process should be treated as due to 
reasonable cause for purposes of section 6651 (imposing penalties for 
failure to file returns and failure to pay tax). This suggestion was 
not adopted because the existence of reasonable cause for late-filing 
and late-payment should be determined on a case by case basis applying 
well-established standards as prescribed under current law.
    In response to comments, the discussion in Sec. 20.2056A-1(c) of 
the proposed regulations, regarding the special rule for estate and 
gift tax treaties, was expanded. Section 7815(d)(14) of the 1989 Act 
added a special rule under which the statutory amendments affecting the 
estate and gift tax marital deduction do not apply when the decedent or 
donor is not a United States citizen or resident and is a resident of a 
country with which the United States has an estate, gift or inheritance 
tax treaty, to the extent such statutory amendments would be 
inconsistent with the treaty provisions. The final regulations provide 
that under this special rule, the estate may choose either the 
statutory deduction under section 2056A or the marital deduction, 
exemption, or credit allowed under the treaty. See H. Rep. No. 247, 101 
Cong. 1st Sess. 1435, n. 99 (September 20, 1989). Thus, the estate may 
not avail itself of both the marital benefit under the treaty and the 
marital deduction under the QDOT provisions of the Code with respect to 
the remainder of the marital property that is not otherwise deductible 
under the treaty. These regulations do not conflict with existing 
treaties.

C. Section 20.2056A-2  Requirements for Qualified Domestic Trust

    Under Sec. 20.2056A-2(a) of the proposed regulations, in order to 
qualify as a QDOT, a trust must be created and maintained under the 
laws of the United States or any state or the District of Columbia. 
Several commentators suggested that this requirement should be deleted 
because it places an additional burden on nonresident aliens with only 
limited contacts with the United States. This comment was not adopted. 
The ability of the Internal Revenue Service to collect the section 
2056A estate tax is adequately protected only if the trust has a 
sufficient nexus with the United States. However, the final regulations 
delete the requirement that the trust be created under the laws of the 
United States. In lieu of that requirement, the final regulations 
provide that the trust may be established by a document executed under 
the laws of either the United States or a foreign jurisdiction, such as 
under a foreign will or trust, provided that the document directs that 
the laws of a particular state of the United States or the District of 
Columbia govern the administration of the trust, and that direction is 
effective under the applicable local law. The final regulations also 
clarify that a trust is ``maintained'' in the United States for 
purposes of this provision if the records of the trust (or copies 
thereof) are kept in the United States.
    Section 20.2056A-2(a) of the proposed regulations also provided 
that in order to qualify as a QDOT, a trust must constitute an 
``explicit trust'' as defined in Sec. 301.7701-4(a) of the regulations. 
The final regulations change this reference to an ``ordinary trust'', 
since that is the term referred to in Sec. 301.7701-4(a). Some 
commentators raised the concern that if property transferred to a QDOT 
includes an active trade or business, the trust may be classified as an 
association taxable as a corporation under Sec. 301.7701-2 and, 
therefore, will not qualify as a QDOT. In response to those comments, 
the final regulations provide that a trust will not fail to be treated 
as an ordinary trust under Sec. 301.7701-4(a) for purposes of section 
2056A solely because of the nature of the assets transferred to that 
trust.

D. Section 20.2056A-3  QDOT Election

    Comments were received recommending that the protective election 
rules contained in Sec. 20.2056A-3(c) of the proposed regulations be 
expanded to permit protective elections with respect to a broader range 
of controversies affecting the availability of the marital deduction 
for property passing to or for the benefit of a noncitizen spouse and 
the time period during which such controversies must arise. In response 
to these comments, the availability of a protective election has been 
revised to cover additional situations. The final regulations provide 
that a protective election may be made only if a bona fide issue is 
presented, the resolution of which is uncertain at the time the federal 
estate tax return is filed. The bona fide issue must concern the 
residency or citizenship of the decedent, the citizenship of the 
surviving spouse, whether an asset is includible in the decedent's 
gross estate, or the amount or nature of the property the surviving 
spouse is entitled to receive. Conforming changes have been made to the 
protective assignment rules 

[[Page 43533]]
of the proposed regulations to reflect these amendments.
    Under Sec. 20.2056A-3(b) of the proposed regulations, partial QDOT 
elections were not permitted. However, the proposed regulations provide 
that if a trust is severed in accordance with the rules under section 
2056(b)(7), a QDOT election may be made for each separate trust. A 
comment was received stating that the phrase ``for each separate 
trust'' implies that if there are two or more trusts after division, an 
election must be made for each trust. The final regulations clarify 
that upon severance of a trust, a QDOT election may be made for any one 
or more of the severed trusts.

E. Section 20.2056A-4  Procedures for Conforming Marital Trusts and 
Nonmarital Transfers to the Requirements of a Qualified Domestic Trust

    A comment was received pointing out that the proposed regulations 
did not specify the time by which a nonjudicial reformation must be 
completed. Accordingly, the final regulations provide that a 
nonjudicial reformation must be completed by the time prescribed 
(including extensions) for filing the decedent's estate tax return. 
This result is consistent with section 2056(d)(5)(A), which provides 
that absent a judicial reformation the determination of the 
qualification of a trust as a QDOT is made as of the date the return is 
filed.
    Section 20.2056A-4(a)(2) of the proposed regulations provide that a 
trust, as reformed, must be effective under local law and irrevocable. 
A trust in which the surviving spouse has an income interest and an 
inter vivos general power of appointment is, in effect, revocable and 
could, therefore, fail to qualify under the proposed regulations. 
Accordingly, the final regulations have been amended to provide that 
the trust as reformed may be revocable by the spouse, or otherwise be 
subject to the spouse's general power of appointment, provided that 
there is no power exercisable by any person to amend the trust during 
the continued period of its existence such that it would no longer 
qualify as a QDOT. Thus, for example, any distributions made pursuant 
to the spouse's exercise of a power to appoint must be subject to the 
requirement that the U.S. Trustee withhold the section 2056A estate 
tax.
    The final regulations provide that prior to the time a judicial 
reformation of the trust is completed, the trustee is responsible for 
filing the Form 706-QDT, paying any section 2056A estate tax that 
becomes due, and filing the annual report if such a report is required. 
In addition, failure to comply with these requirements may cause the 
trust to be subject to the anti-abuse rule under Sec. 20.2056A-
2T(d)(1)(iv). A claim for refund may be filed to recover any section 
2056A estate tax paid by the trust if the judicial reformation is 
terminated prior to completion. In addition, if the judicial 
reformation is terminated prior to completion, the trustee of the trust 
is liable for the additional estate tax on the decedent's estate that 
becomes due at the time of the termination due to the trust's failure 
to comply with section 2056A.
    Comments were received criticizing the rule contained in 
Sec. 20.2056A-4(b)(5) of the proposed regulations, that a transfer of 
property by the surviving spouse or the decedent's executor to a QDOT 
created by the spouse pursuant to section 2056(d)(2)(B) is treated as a 
transfer from the decedent solely for purposes of section 
2056(d)(2)(A). For all other purposes, e.g., income, gift, estate, 
generation-skipping transfer tax and section 1491, the proposed 
regulations provide that the property is treated as passing from the 
surviving spouse to the trust. The comments suggested that although 
section 2056A(b)(15) provides for tax exempt reimbursement to the 
spouse of income taxes paid by the spouse with respect to trust items, 
that provision should not be interpreted as acknowledging that all 
QDOTs created by the surviving spouse or by the decedent's executor are 
grantor trusts for income tax purposes.
    The final regulations retain the rule that the surviving spouse is 
treated as the transferor of the property transferred to a QDOT 
pursuant to section 2056(d)(2)(B). It is believed that this treatment 
is consistent with Congressional intent, as evidenced by section 
2056A(b)(15). However, because of the potentially unanticipated result 
in the case of completed transfers to trusts by the surviving spouse 
where the spouse retains an income interest, Sec. 25.2702-1(c) of the 
regulations is amended by this document to provide that property 
assigned or transferred to a QDOT by the surviving spouse, where the 
surviving spouse retains an income interest in the transferred 
property, is not subject to the special valuation rules of section 
2702. See Sec. 25.2702-1(c)(8). The final regulations also provide that 
the surviving spouse is not considered the transferor of property to a 
QDOT if the transfer by the spouse constitutes a transfer that 
satisfies the requirements of section 2518(c)(3).
    Section 20.2056A-4(b) of the proposed regulations provide that if 
property is transferred or assigned to a QDOT by the surviving spouse 
pursuant to section 2056(d)(2)(B), the QDOT need not be a trust that 
would otherwise qualify for a marital deduction under section 2056(a). 
A question has been raised whether this rule applies regardless of 
whether the trust was created by the decedent during life or by will, 
by the surviving spouse, or by the decedent's executor. Accordingly, 
the final regulations clarify that if the spouse transfers property to 
a QDOT pursuant to section 2056(d)(2)(B), the transferee trust need not 
(with one exception) be in a form necessary to qualify for a marital 
deduction under section 2056(a) regardless of whether the trust is 
created by the decedent, the surviving spouse or the decedent's 
executor. However, the final regulations provide that, once funded, 100 
percent of the transferee trust must consist of assets that qualify for 
the marital deduction under the Code. This rule is necessary to avoid 
complicated tracing issues under section 2056A(b)(1). Therefore, if the 
decedent also bequeaths property to the trust under his will, the trust 
will need to conform to the marital trust requirements in order that 
all of the trust property qualifies for the marital deduction under 
section 2056(a).
    Section 20.2056A-4(b)(3) of the proposed regulations provide that 
only assets passing from the decedent to the spouse that are included 
in the decedent's gross estate may be transferred or assigned to a 
QDOT. The language of the proposed regulations could be viewed as 
providing that assets originally owned at any time by the surviving 
spouse cannot be assigned to the QDOT, even if those assets in fact are 
included in the decedent's gross estate. For example, a question has 
been raised whether property owned by the surviving spouse that was 
transferred to the decedent and then subsequently bequeathed to the 
surviving spouse could be transferred or assigned to a QDOT. In order 
to address this concern, the final regulations have been clarified to 
provide that the surviving spouse may transfer or assign to the QDOT 
any property included in the decedent's gross estate and passing to the 
spouse at death. However, the spouse may not transfer property owned by 
the spouse at the time of the decedent's death, in lieu of property 
passing from the decedent.
    In response to comments, the final regulations specifically address 
the transfer or assignment of property to a QDOT in the case of the 
death or incompetency of the surviving spouse. The final regulations 
provide that the transfer or assignment of property to a 

[[Page 43534]]
QDOT may be made by either the surviving spouse, the surviving spouse's 
legal representative (if the surviving spouse is incompetent), or by 
the surviving spouse's executor (if the surviving spouse subsequently 
dies).
    Comments were received suggesting that the method adopted in 
Sec. 20.2056A-4(c)(4) of the proposed regulations for computing the 
``corpus portion'' of a nonassignable annuity payment be revised. The 
comments suggested that the corpus portion of each payment should be 
computed based on that portion of each payment excluded from the 
spouse's income under section 72. Alternatively, it was suggested that 
the determination of the corpus portion should be keyed to the 
threshold for imposition of the section 4980A excise tax on excess 
distributions (generally amounts distributed in excess of $150,000). 
Both of these suggestions were rejected. The methodology in the 
regulations is designed to realistically approximate the portion of 
each payment representing income and corpus based on the present value 
of the benefit, the expected term of the annuity, and the assumed rate 
of return. On the other hand, basing the determination on the extent to 
which each payment is included in the spouse's income would produce 
arbitrary and unrealistic results. For example, in the case of a 
noncontributory qualified plan, the entire payment will be includible 
in gross income and thus no portion would be allocated to corpus. 
Similarly, under the section 4980A approach, the first $150,000 of 
payments will be arbitrarily allocated to income regardless of the 
amount of the total annual payment. It is believed that neither of 
these methods provides an accurate or realistic measure of the income 
or corpus portion of each payment.
    Guidance was requested regarding whether an individual retirement 
account (IRA) described in section 408(a) is a nonassignable annuity or 
other arrangement eligible for the procedures contained in 
Sec. 20.2056A-4(c). In general, individual retirement accounts under 
section 408(a) are assignable but individual retirement annuities under 
section 408(b) are not assignable (and thus, are eligible for the 
special procedures described in Sec. 20.2056A-4(c)). However, if an 
individual retirement account is assigned to a trust with respect to 
which the surviving spouse is not treated as the owner under section 
671 et seq. (providing rules for the treatment of grantor trusts), then 
the entire account balance is treated as a distribution to the spouse 
includible in the spouse's gross income under section 408(d) in the 
taxable year in which the assignment is made.
    In view of this significant tax burden attendant to the assignment 
of an individual retirement account to a nongrantor trust, the final 
regulations allow the spouse to treat the individual retirement account 
as nonassignable for purposes of Sec. 20.2056A-4(c) and thus, eligible 
for the procedures contained in that section. However, if the spouse 
does assign the individual retirement account to a trust pursuant to 
Secs. 20.2056A-2(b)(2) and 20.2056A-4(b) (either a grantor trust or a 
nongrantor trust), then Sec. 20.2056A-4(b)(7) (providing that an 
assignment of an assignable annuity or other arrangement to a trust is 
treated as a transfer of the property to a QDOT regardless of the 
method of payment actually elected) will apply. Thus, under the final 
regulations, if the individual retirement account is assignable, the 
spouse has the option of either assigning the individual retirement 
account to a QDOT, or using the procedures contained in Sec. 20.2056A-
4(c).
    In response to comments, Sec. 20.2056A-4(c) of the proposed 
regulations has been modified to provide that if the financial 
circumstances of the spouse are such that an amount equal to all or a 
part of the corpus portion of a nonassignable annuity payment received 
by the spouse would be eligible for a hardship exemption (as defined in 
Sec. 20.2056A-5(c)), if paid from a QDOT, then all or a corresponding 
part of the payment will be exempt from the rollover or the tax payment 
requirements, depending upon which option is selected by the spouse.
    In response to comments, the agreements required under 
Sec. 20.2056A-4(c) of the proposed regulations (pertaining to the 
spouse's undertaking to roll over nonassignable annuity payments to a 
QDOT or pay a section 2056A estate tax on each payment) have been 
revised. In the final regulations, both forms of agreements provide 
that in the event of a failure to timely file the Form 706-QDT or a 
failure to either (1) timely pay the section 2056A estate tax on the 
corpus portion of the annuity payment, or (2) timely roll over the 
corpus portion to a QDOT, the surviving spouse may make an application 
for relief under Sec. 301.9100-1 of the Procedure and Administration 
Regulations, from the consequences of the failures. This is in lieu of 
the automatic acceleration of the balance of the section 2056A estate 
tax as provided in the proposed regulations.
    Under the proposed regulations, both forms of agreements provided 
that the surviving spouse must agree, at the request of the District 
Director (or the Assistant Commissioner (International) in the case of 
a surviving spouse of a nonresident alien decedent or a surviving 
spouse of a United States citizen who died domiciled outside the United 
States) to enter into a security agreement to secure the spouse's 
undertakings under the agreement. Comments were received objecting to 
the open-ended nature of this security requirement. In response to 
these comments, the final regulations have been amended so that this 
provision applies only in those cases in which the plan or arrangement 
from which the annuity will be paid is established and administered by 
a person or entity that is located outside of the United States. In the 
case of these foreign plans, additional security requirements may be 
necessary to assure collectibility of the section 2056A estate tax.

F. Section 20.2056A-5  Imposition of the Section 2056A Estate Tax

    Comments were received regarding Sec. 20.2056A-5(c)(2) of the 
proposed regulations which provides that items will be characterized as 
``income'' for purposes of section 2056A(b)(3)(A) and section 
2056A(c)(2) based on applicable state law, regardless of the terms of 
the instrument. Commentators maintained that this provision created 
unnecessary complexity in the administration of QDOTs in jurisdictions 
with no statutes governing allocation of receipts between principal and 
income. The commentators suggested that if local law or statutory law 
is silent regarding treatment of an item, the allocation of the item 
should be based on the terms of the governing instrument with certain 
specified exclusions (such as capital gains). This suggestion was not 
adopted, in part, because the grant of this broad discretion would not 
be consistent with the legislative history underlying section 
2056A(b)(1). Instead, the final regulations provide that when local law 
is silent, reference will be made to general principles of law (such 
as, for example, the Uniform Principal and Income Act) and that these 
principles will override any provisions to the contrary in the 
governing instrument. In addition, the final regulations provide that 
for purposes of section 2056A(b)(3)(A), ``income'' does not include (in 
addition to the exclusion for capital gains) items constituting income 
in respect of a decedent under section 691, regardless of the 
characterization thereof under local law, except to the extent provided 
in administrative guidance published by the Service. The IRS added this 
exclusion because it is 

[[Page 43535]]
believed that local law may inappropriately characterize certain items 
of IRD (income in respect of a decedent) as income, contrary to the 
purposes of section 2056A, and it was determined that exceptions to 
this rule of exclusion should be made on a case by case basis. However, 
in cases where a QDOT is designated by the decedent as a beneficiary of 
a pension or profit sharing plan described in section 401(a), or an 
individual retirement account or annuity described in section 408, the 
proceeds of which are payable to the QDOT in the form of an annuity, 
the final regulations provide that any payments received by the QDOT 
may be allocated between income and corpus using the method prescribed 
under Sec. 20.2056A-4(c) for determining the corpus and income portion 
of an annuity payment.
    A comment was received recommending revision of Sec. 20.2056A-
5(c)(3) of the proposed regulations to specifically authorize 
nontaxable reimbursement to the spouse for income taxes for which the 
spouse is liable if the spouse receives a lump sum distribution from a 
qualified plan and assigns the distribution to the QDOT. In response to 
this comment, the final regulations have been modified to provide that 
amounts paid from the QDOT to reimburse the spouse for such income 
taxes are not subject to the section 2056A estate tax. In addition, the 
provisions for nontaxable distributions to the spouse contained in 
section 2056A(b)(15) (regarding reimbursement for certain income taxes 
paid by the spouse) have been incorporated into Sec. 20.2056A-5(c)(3) 
of the final regulations to ensure completeness. With respect to the 
amount of the reimbursement, the final regulations provide that the 
amount of tax eligible for reimbursement is the difference between the 
income tax liability of the spouse (as reported on the spouse's income 
tax return) and the spouse's income tax liability determined as if the 
item had not been included in the spouse's gross income in the 
applicable taxable year.
    In response to comments, the definition of a hardship distribution 
has been expanded. Under the final regulations, a distribution to the 
spouse is deemed made on account of hardship if the distribution is 
made to the spouse from the QDOT in response to an immediate and 
substantial financial need relating to the spouse's health, 
maintenance, education or support, or the health, education, 
maintenance or support of any person that the surviving spouse is 
legally obligated to support.
    One comment suggested modifying the regulations to provide that in 
making a distribution, the trustee may rely upon a statement by the 
surviving spouse claiming hardship under the regulations. It was 
decided that this change not be made. Trustees must frequently make 
decisions concerning whether a distribution is warranted under a 
particular standard under the trust document. It is believed that a 
QDOT presents no special circumstances that would justify a deviation 
from normal fiduciary practices under these circumstances.
    Language has been added to the final regulations to further clarify 
what assets are considered ``reasonably available'' to the surviving 
spouse for purposes of determining whether the assets must be 
liquidated before a hardship distribution may be made. The final 
regulations provide that assets such as closely held business 
interests, real estate and tangible personalty are not considered 
assets that are reasonably available.

G. Section 20.2056A-6  Amount of Tax

    Under the proposed regulations, in computing the estate tax imposed 
under section 2056A(b)(1)(B) on the death of the surviving spouse, a 
credit for state or foreign death taxes under sections 2011 or 2014, 
respectively, is allowable only if the state or foreign jurisdiction 
actually imposed additional tax on the QDOT at the time of the taxable 
event (i.e., only if the jurisdiction had a statutory provision similar 
in effect to section 2056A). A comment was received that this 
limitation was inappropriate and was not consistent with the 
legislative history underlying section 2056A(b)(10). See 136 Cong. Rec. 
H7147 (daily ed. Aug. 3, 1990). In response to this comment, the final 
regulations provide that if state or foreign death taxes are paid by 
the surviving spouse's estate with respect to the QDOT (because the 
QDOT is included in the surviving spouse's gross estate for state or 
foreign tax purposes), the taxes are creditable to the extent provided 
in sections 2011 or 2014 in computing the section 2056A estate tax. In 
addition, the final regulations provide that state or foreign death 
taxes previously paid by the decedent/transferor's estate are also 
creditable within the section 2011 or 2014 framework. A new example has 
been added to the final regulations to illustrate this application of 
the state death tax credit.

H. Section 20.2056A-7  Allowance of Prior Transfer Credit Under Section 
2013

    The proposed regulations provided that the ``first limitation'' in 
determining the allowable section 2013 credit with respect to the 
section 2056A estate tax imposed on the spouse's death is deemed to be 
the section 2056A estate tax imposed. This approach was adopted to 
avoid certain computational and interpretative problems that would be 
presented if the methodology described in section 2013(b) and 
Sec. 20.2013-2 was used. The final regulations retain this approach.
    In order to ensure consistency, the final regulations adopt two 
additional modifications to the section 2013 regime in computing the 
allowable credit with respect to the section 2056A estate tax. Under 
Sec. 20.2013-4(a), the amount of the transfer, based on which the 
``first limitation'' and ``second limitation'' are determined, is the 
value at which the property was included in the transferor's gross 
estate. Further, under Sec. 20.2013-4(b), the amount of the transfer is 
reduced by any estate and inheritance taxes payable out of the property 
transferred to the transferee decedent. However, under Sec. 20.2056A-7, 
the ``first limitation'' is the amount of the section 2056A estate tax 
determined based on the value of the QDOT on the death of the 
transferee spouse and any corpus distributions made prior to that time 
that were subject to tax under section 2056A(b)(1)(A). This same value 
should be used in determining the ``second limitation.'' Further, since 
the entire value of the QDOT, unreduced by the amount of the section 
2056A estate tax, is included in the transferee spouse's gross estate 
(see section 2053(c)(1)(B)), this amount (unreduced by the section 
2056A estate tax) should be used in determining the ``second 
limitation''. Otherwise, the credit mechanism will not adequately avoid 
the double taxation the credit was intended to alleviate in the case of 
property which has appreciated since the death of the first decedent, 
and would confer an unintended windfall in the case of property which 
has declined in value. Accordingly, the final regulations provide that, 
for purposes of the ``second limitation'' as described in section 
2013(c), the value of the property transferred to the decedent is the 
value of the QDOT on the date of death of the surviving spouse. This 
value is not reduced by the section 2056A estate tax imposed at the 
time of the spouse's death. An example has been added illustrating the 
computation of the prior transfer credit. 

[[Page 43536]]


I. Section 20.2056A-8  Special Rules for Joint Property

    Several comments were received concerning the proper interpretation 
of sections 2056(d)(1) and 2056(d)(2) where joint property passing to a 
spouse is transferred by the spouse to a QDOT. Section 2056(d)(1) 
provides that if the surviving spouse is not a citizen then, except as 
provided in section 2056(d)(2), no marital deduction is allowed and 
section 2040(a), rather than section 2040(b), applies in determining 
the extent to which the joint property is included in the decedent's 
gross estate. Section 2056(d)(2) provides, inter alia, that section 
2056(d)(1) does not apply to any property passing to a QDOT. Comments 
have been received suggesting that under a literal interpretation of 
these provisions, if joint property includible in the decedent's gross 
estate is transferred by the surviving spouse to a QDOT, the provisions 
of section 2056(d)(1)(B) do not apply and, therefore, section 2040(b) 
(and not section 2040(a)) would apply to determine the extent to which 
the joint property is included in the gross estate. The final 
regulations do not adopt this comment. The statutory provisions should 
be interpreted as providing that section 2040(a) applies in all events 
in determining the extent to which spousal joint property is includible 
in the gross estate, regardless of whether the spouse transfers the 
property to a QDOT. Under section 2056(d)(2), any property so 
includible will qualify for the marital deduction if it is timely 
transferred to a QDOT. The result of the suggested interpretation would 
be circular in effect: the gross estate would be continually reduced by 
transfers of property to the QDOT and the size of the gross estate 
would affect the amount that would need to be transferred to the QDOT 
so that no net estate tax would be due.
    Commentators requested clarification of the ``consideration 
furnished'' rule contained in Sec. 20.2056A-8(a)(2) of the proposed 
regulations has been clarified. This rule provided that for purposes of 
applying section 2040(a), in determining the amount of consideration 
furnished by the surviving spouse, any consideration furnished by the 
decedent with respect to the acquisition of the property before July 
14, 1988, is treated as consideration furnished by the surviving spouse 
to the extent that the consideration was treated as a gift to the 
spouse under section 2511, or to the extent that the decedent elected 
to treat the transfer as a gift to the spouse under section 2515 (prior 
to repeal by the Economic Recovery Tax Act of 1981). Under the proposed 
regulations, this special rule was applicable only if the donor spouse 
predeceased the donee spouse. The final regulations clarify that in 
cases where the donee spouse predeceases the donor spouse, the amount 
treated as a gift to the decedent/donee spouse on the creation of the 
tenancy is not treated as the donee spouse's contribution towards the 
acquisition of the property for purposes of section 2040(a). Thus, if 
the donee spouse provided no other consideration towards the 
acquisition of the property, no part of the property would be 
includible in the decedent/donee's gross estate under section 2040(a). 
No inference is intended as to the applicable rules in effect prior to 
the effective date of these regulations. Two additional examples have 
been added to further illustrate the application of the joint property 
rules.

J. Section 20.2056A-9  Designated Filer

    In response to comments, the time period accorded the U.S. Trustee 
for submitting Schedule B, Form 706-QDT, to the Designated Filer has 
been increased from thirty to sixty days prior to the due date for 
filing the return. Also, in response to comments, the rule in the 
proposed regulations that the Designated Filer may allocate the section 
2056A estate tax among the various QDOTs in the Designated Filer's 
discretion has been modified. The final regulations provide that the 
tax due from each QDOT is allocated on a pro rata basis (based on the 
ratio of the amount of the respective taxable events in each QDOT to 
the amount of all such taxable events), unless a different allocation 
is required in the governing instrument or under local law.
    In response to comments suggesting that the regulations provide 
guidance in the event that the Designated Filer ceases to qualify as a 
U.S. Trustee, the final regulations provide that unless the decedent 
has provided for a successor Designated Filer, if the Designated Filer 
ceases to qualify as a U.S. Trustee or otherwise becomes unable to 
serve as the Designated Filer, the remaining trustees are required to 
select a qualifying successor Designated Filer (who is also a U.S. 
Trustee) prior to the due date for the filing of the next Form 706-QDT. 
Failure to select a successor Designated Filer will result in the 
application of section 2056A(b)(2)(C).

K. Section 20.2056A-11  Filing Requirements and Payment of Section 
2056A Estate Tax

    Comments were received suggesting that in the case of multiple 
QDOTs with respect to the same decedent, the extent of the trustees' 
liability for the amount of the section 2056A estate tax should be 
clarified. It was suggested that a trustee should be personally liable 
for the amount of any section 2056A estate tax imposed on any taxable 
event with respect to that trustee's trust, but should not be 
personally liable for tax imposed on the other trusts with respect to 
that decedent. In response to this comment, the trustee liability 
provisions of Sec. 20.2056A-11(d) of the proposed regulations have been 
modified. In the case of multiple QDOTs with respect to the same 
decedent, each trustee of a QDOT is personally liable for the amount of 
the tax imposed on any taxable event with respect to that trustee's 
QDOT and a trustee is not personally liable for tax imposed with 
respect to taxable events involving QDOTs of which that person is not a 
trustee. However, the assets of a trust would be subject to collection 
for the section 2056A estate tax due with respect to any other trust 
with respect to that decedent.

L. Section 25.2523(i)-1  Disallowance of Gift Tax Marital Deduction 
When Spouse Is Not a United States Citizen

    Comments were received concerning the conclusion in example 4 under 
Sec. 25.2523(i)-1(d) of the proposed regulations. This example involves 
the transfer in trust to a noncitizen spouse with income payable to the 
spouse for life and remainder to the children of the donor. As 
proposed, the example concludes that the transfer is eligible for the 
$100,000 annual exclusion based on the rationale that if the donee were 
a citizen, the gift would qualify for a marital deduction if a 
qualified terminable interest property election were made. In response 
to the comments on this issue, the IRS has concluded that this result 
is not consistent with the statute because the gift does not qualify 
for the marital deduction ``but for'' the application of section 
2523(i)(1). See section 2523(i)(2). The gift only qualifies for the 
marital deduction if an election is made under section 2523(f)(4) to 
treat the trust as qualified terminable interest property. This 
election is not available if the donee spouse is not a United States 
citizen. The statutory requirement that only gifts that would have 
qualified for the marital deduction but for section 2523(i) are 
eligible for the increased annual exclusion is intended to ensure that 
only gifts that would be includible in the spouse's gross estate at 
death (if the spouse were a United States citizen) qualify for the 
increased exclusion. This was not the case in the example as proposed 
and, as a result, the 

[[Page 43537]]
conclusion in the example has been changed.

M. Section 25.2523(i)-2  Treatment of Spousal Joint Tenancy Property 
Where One Spouse Is Not a United States Citizen

    Section 2523(i)(3) provides that the rules of section 2515 prior to 
repeal by the Economic Recovery Tax Act of 1981 shall generally apply 
if the donee spouse is not a United States citizen. The provision is 
effective for gifts made after July 14, 1988.
    In response to comments, the final regulations under 
Sec. 25.2523(i)-2(b) have been expanded to more fully describe the 
consequences of terminations of tenancies by the entirety and joint 
tenancies after July 13, 1988, where the donee spouse is not a United 
States citizen. As prescribed by statute, the gift tax consequences of 
the termination are governed by the principles of section 2515 (prior 
to repeal) and the regulations thereunder. Generally, under these 
rules, the gift tax consequences were dependent on whether or not the 
creation of the tenancy was initially treated as a gift under section 
2515(a). Questions have been raised regarding the gift tax treatment 
for terminations of tenancies that were created after 1981 and before 
July 14, 1988. During this time period, section 2515 was not applicable 
and the generic principles of section 2511 governed the gift tax 
treatment of the creation of a joint tenancy or tenancy by the 
entirety. Accordingly, in response to these comments, the final 
regulations provide that, in the case of a termination on or after July 
14, 1988, of a tenancy by the entirety or a joint tenancy that was 
created after 1981 and before July 14, 1988, if the creation of the 
tenancy was treated as a gift to the noncitizen donee spouse under 
section 2511 then, upon termination of the tenancy, the value of the 
property treated as a gift upon creation of the tenancy is treated as 
consideration originally belonging to the noncitizen spouse and never 
acquired by the noncitizen spouse from the donor spouse. With respect 
to the termination on or after July 14, 1988, of a tenancy by the 
entirety or joint tenancy created after 1954 and before 1982 (during 
which period section 2515 applied), the consequences of termination are 
determined under the rules of section 2515 and the regulations 
thereunder.

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 also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Small Business Administration for comment on its 
impact on small business.

Drafting Information

    The principal author of these regulations is Susan B. Hurwitz, 
Office of Assistant Chief Counsel (Passthroughs and Special 
Industries), Internal Revenue Service. Other personnel from the IRS and 
Treasury Department participated in developing these regulations.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 20, 25, and 602 are amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C 7805 * * *

    Par. 2. Sec. 1.1015-5 is amended as follows:
    a. The headings for paragraphs (a) and (b) are revised.
    b. Paragraph (c) is redesignated as paragraph (d).
    c. A new paragraph (c) is added.
    The revisions and additions read as follows:


Sec. 1.1015-5  Increased basis for gift tax paid.

    (a) General rule in the case of gifts made  on  or  before  
December  31,  1976. * * *
* * * * *
    (b) Amount of gift tax paid with respect to gifts made on or before 
December 31, 1976. * * *
* * * * *
    (c) Special rule for increased basis for gift tax paid in the case 
of gifts made after December 31, 1976--(1) In general. With respect to 
gifts made after December 31, 1976 (other than gifts between spouses 
described in section 1015(e)), the increase in basis for gift tax paid 
is determined under section 1015(d)(6). Under section 1015(d)(6)(A), 
the increase in basis with respect to gift tax paid is limited to the 
amount (not in excess of the amount of gift tax paid) that bears the 
same ratio to the amount of gift tax paid as the net appreciation in 
value of the gift bears to the amount of the gift.
    (2) Amount of gift. In general, for purposes of section 
1015(d)(6)(A)(ii), the amount of the gift is determined in conformance 
with the provisions of paragraph (b) of this section. Thus, the amount 
of the gift is the amount included with respect to the gift in 
determining (for purposes of section 2503(a)) the total amount of gifts 
made during the calendar year (or calendar quarter in the case of a 
gift made on or before December 31, 1981), reduced by the amount of any 
annual exclusion allowable with respect to the gift under section 
2503(b), and any deductions allowed with respect to the gift under 
section 2522 (relating to the charitable deduction) and section 2523 
(relating to the marital deduction). Where more than one gift of a 
present interest in property is made to the same donee during a 
calendar year, the annual exclusion shall apply to the earliest of such 
gifts in point of time.
    (3) Amount of gift tax paid with respect to the gift. In general, 
for purposes of section 1015(d)(6), the amount of gift tax paid with 
respect to the gift is determined in conformance with the provisions of 
paragraph (b) of this section. Where more than one gift is made by the 
donor in a calendar year (or quarter in the case of gifts made on or 
before December 31, 1981), the amount of gift tax paid with respect to 
any specific gift made during that period is the amount which bears the 
same ratio to the total gift tax paid for that period (determined after 
reduction for any gift tax unified credit available under section 2505) 
as the amount of the gift (computed as described in paragraph (c)(2) of 
this section) bears to the total taxable gifts for the period.
    (4) Qualified domestic trusts. For purposes of section 1015(d)(6), 
in the case of a qualified domestic trust (QDOT) described in section 
2056A(a), 

[[Page 43538]]
any distribution during the noncitizen surviving spouse's lifetime with 
respect to which a tax is imposed under section 2056A(b)(1)(A) is 
treated as a transfer by gift, and any estate tax paid on the 
distribution under section 2056A(b)(1)(A) is treated as a gift tax. The 
rules under this paragraph apply in determining the extent to which the 
basis in the assets distributed is increased by the tax imposed under 
section 2056A(b)(1)(A).
    (5) Examples. Application of the provisions of this paragraph (c) 
may be illustrated by the following examples:

    Example 1. (i) Prior to 1995, X exhausts X's gift tax unified 
credit available under section 2505. In 1995, X makes a gift to X's 
child Y, of a parcel of real estate having a fair market value of 
$100,000. X's adjusted basis in the real estate immediately before 
making the gift was $70,000. Also in 1995, X makes a gift to X's 
child Z, of a painting having a fair market value of $70,000. X 
timely files a gift tax return for 1995 and pays gift tax in the 
amount of $55,500, computed as follows:

                                                                        
                                                                        
Value of real estate transferred to Y...........    $100,000  ..........
Less: Annual exclusion..........................      10,000  ..........
                                                 ------------           
Included amount of gift (C).....................  ..........     $90,000
Value of painting transferred to Z..............     $70,000  ..........
Less: annual exclusion..........................      10,000  ..........
                                                 ------------           
Included amount of gift.........................  ..........      60,000
                                                             -----------
    Total included gifts (D)....................  ..........    $150,000
    Total gift tax liability for 1995 gifts (B).  ..........     $55,500

(ii) The gift tax paid with respect to the real estate transferred 
to Y, is determined as follows:

[GRAPHIC][TIFF OMITTED]TR22AU95.005

    (iii) (A) The amount by which Y's basis in the real property is 
increased is determined as follows:

[GRAPHIC][TIFF OMITTED]TR22AU95.006

    (B) Y's basis in the real property is $70,000 plus $11,100, or 
$81,100. If  x  had not exhausted any of X's unified credit, no gift 
tax would have been paid and, as a result, Y's basis would not be 
increased.
    Example 2. (i) X dies in 1995. X's spouse, Y, is not a United 
States citizen. In order to obtain the marital deduction for 
property passing to X's spouse, X established a QDOT in X's will. In 
1996, the trustee of the QDOT makes a distribution of principal from 
the QDOT in the form of shares of stock having a fair market value 
of $70,000 on the date of distribution. The trustee's basis in the 
stock (determined under section 1014) is $50,000. An estate tax is 
imposed on the distribution under section 2056A(b)(1)(A) in the 
amount $38,500, and is paid. Y's basis in the shares of stock is 
increased by a portion of the section 2056A estate tax paid 
determined as follows:
[GRAPHIC][TIFF OMITTED]TR22AU95.007

    (ii) Y's basis in the stock is $50,000 plus $11,000, or $61,000.

    (6) Effective date. The provisions of this paragraph (c) are 
effective for gifts made after August 22, 1995.
* * * * *

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954

    Par. 3. The authority citation for part 20 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805. * * *

    Par. 4. In Sec. 20.2056-0, the table of contents is amended by:
    a. Redesignating the entries for Secs. 20.2056(d)-1 and 20.2056(d)-
2 as Secs. 20.2056(d)-2 and 20.2056(d)-3, respectively.
    b. Adding a new entry for Sec. 20.2056(d)-1 to read as follows:


Sec. 20.2056-0  Table of contents

* * * * *

Sec. 20.2056(d)-1  Marital deduction; special rules for marital 
deduction if surviving spouse is not a United States citizen.

* * * * *
    Par. 5. Sections 20.2056(d)-1 and 20.2056(d)-2 are redesignated as 
Secs. 20.2056(d)-2 and 20.2056(d)-3, respectively, and new 
Sec. 20.2056(d)-1 is added to read as follows:


Sec. 20.2056(d)-1  Marital deduction; special rules for marital 
deduction if surviving spouse is not a United States citizen.

    Rules pertaining to the application of section 2056(d), including 
certain transition rules, are contained in Secs. 20.2056A-1 through 
20.2056A-13.
    Par. 6. Sections 20.2056A-0 through 20.2056A-13 are added to read 
as follows:


Sec. 20.2056A-0  Table of contents.

    This section lists the captions that appear in the final 
regulations under Secs. 20.2056A-1 through 20.2056A-13.

Sec. 20.2056A-1  Restrictions on allowance of marital deduction if 
surviving spouse is not a United States citizen.

    (a) General rule.
    (b) Marital deduction allowed if resident spouse becomes 
citizen.
    (c) Special rules in the case of certain transfers subject to 
estate and gift tax treaties.

Sec. 20.2056A-2  Requirements for qualified domestic trust.

    (a) In general.
    (b) Qualified marital interest requirements.
    (1) Property passing to QDOT.
    (2) Property passing outright to spouse.
    (3) Property passing under a nontransferable plan or 
arrangement.
    (c) Statutory requirements.
    (d) [Reserved]

Sec. 20.2056A-3  QDOT election.

    (a) General rule.
    (b) No partial elections.
    (c) Protective elections.
    (d) Manner of election.

Sec. 20.2056A-4  Procedures for conforming marital trusts and 
nontrust marital transfers to the requirements of a qualified 
domestic trust.

    (a) Marital trusts.
    (1) In general.
    (2) Judicial reformations.
    (3) Tolling of statutory assessment period.
    (b) Nontrust marital transfers.
    (1) In general. 

[[Page 43539]]

    (2) Form of transfer or assignment.
    (3) Assets eligible for transfer or assignment.
    (4) Pecuniary assignment--special rules.
    (5) Transfer tax treatment of transfer or assignment.
    (6) Period for completion of transfer.
    (7) Retirement accounts and annuities.
    (8) Protective assignment.
    (c) Nonassignable annuities and other arrangements.
    (1) Definition and general rule.
    (2) Agreement to remit section 2056A estate tax on corpus 
portion of each annuity payment.
    (3) Agreement to roll over corpus portion of annuity payment to 
QDOT.
    (4) Determination of corpus portion.
    (5) Information Statement.
    (6) Agreement to pay section 2056A estate tax.
    (7) Agreement to roll over annuity payments.
    (d) Examples.

Sec. 20.2056A-5  Imposition of section 2056A estate tax.

    (a) In general.
    (b) Amounts subject to tax.
    (1) Distribution of principal during the spouse's lifetime.
    (2) Death of surviving spouse.
    (3) Trust ceases to qualify as QDOT.
    (c) Distributions and dispositions not subject to tax.
    (1) Distributions of principal on account of hardship.
    (2) Distributions of income to the surviving spouse.
    (3) Certain miscellaneous distributions and dispositions.

Sec. 20.2056A-6  Amount of tax.

    (a) Definition of tax.
    (b) Benefits allowed in determining amount of section 2056A 
estate tax.
    (1) General rule.
    (2) Treatment as resident.
    (3) Special rule in the case of trusts described in section 
2056(b)(8).
    (4) Credit for state and foreign death taxes.
    (5) Alternate valuation and special use valuation.
    (c) Miscellaneous rules.
    (d) Examples.

Sec. 20.2056A-7  Allowance of prior transfer credit under section 
2013.

    (a) Property subject to QDOT election.
    (b) Property not subject to QDOT election.
    (c) Example.

Sec. 20.2056A-8  Special rules for joint property.

    (a) Inclusion in gross estate.
    (1) General rule.
    (2) Consideration furnished by surviving spouse.
    (3) Amount allowed to be transferred to QDOT.
    (b) Surviving spouse becomes citizen.
    (c) Examples.

Sec. 20.2056A-9  Designated Filer.

Sec. 20.2056A-10  Surviving spouse becomes citizen after QDOT 
established.

    (a) Section 2056A estate tax no longer imposed under certain 
circumstances.
    (b) Special election by spouse.

Sec. 20.2056A-11  Filing requirements and payment of the section 
2056A estate tax.

    (a) Distributions during surviving spouse's life.
    (b) Tax at death of surviving spouse.
    (c) Extension of time for paying section 2056A estate tax.
    (1) Extension of time for paying tax under section 6161(a)(2).
    (2) Extension of time for paying tax under section 6161(a)(1).
    (d) Liability for tax.

Sec. 20.2056A-12  Increased basis for section 2056A estate tax paid 
with respect to distribution from a QDOT.
Sec. 20.2056A-13  Effective date.


Sec. 20.2056A-1  Restrictions on allowance of marital deduction if 
surviving spouse is not a United States citizen.

    (a) General rule. Subject to the special rules provided in section 
7815(d)(14) of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 
101-239; 103 Stat. 2106), in the case of a decedent dying after 
November 10, 1988, the federal estate tax marital deduction is not 
allowed for property passing to or for the benefit of a surviving 
spouse who is not a United States citizen at the date of the decedent's 
death (whether or not the surviving spouse is a resident of the United 
States) unless--
    (1) The property passes from the decedent to (or pursuant to)--
    (i) A qualified domestic trust (QDOT) described in section 2056A 
and Sec. 20.2056A-2;
    (ii) A trust that, although not meeting all of the requirements for 
a QDOT, is reformed after the decedent's death to meet the requirements 
of a QDOT (see Sec. 20.2056A-4(a));
    (iii) The surviving spouse not in trust (e.g., by outright bequest 
or devise, by operation of law, or pursuant to the terms of an annuity 
or other similar plan or arrangement) and, prior to the date that the 
estate tax return is filed and on or before the last date prescribed by 
law that the QDOT election may be made (no more than one year after the 
time prescribed by law, including extensions, for filing the return), 
the surviving spouse either actually transfers the property to a QDOT 
or irrevocably assigns the property to a QDOT (see Sec. 20.2056A-4(b)); 
or
    (iv) A plan or other arrangement that would have qualified for the 
marital deduction but for section 2056(d)(1)(A), and whose payments are 
not assignable or transferable to a QDOT, if the requirements of 
Sec. 20.2056A-4(c) are met; and
    (2) The executor makes a timely QDOT election under Sec. 20.2056A-
3.
    (b) Marital deduction allowed if resident spouse becomes citizen. 
For purposes of section 2056(d)(1) and paragraph (a) of this section, 
the surviving spouse is treated as a citizen of the United States at 
the date of the decedent's death if the requirements of section 
2056(d)(4) are satisfied. For purposes of section 2056(d)(4)(A) and 
notwithstanding Sec. 20.2056A-3(a), a return filed prior to the due 
date (including extensions) is considered filed on the last date that 
the return is required to be filed (including extensions), and a late 
return filed at any time after the due date is considered filed on the 
date that it is actually filed. A surviving spouse is a resident only 
if the spouse is a resident under chapter 11 of the Internal Revenue 
Code. See Sec. 20.0-1(b)(1). The status of the spouse as a resident 
under section 7701(b) is not relevant to this determination except to 
the extent that the income tax residency of the spouse is pertinent in 
applying Sec. 20.0-1(b)(1).
    (c) Special rules in the case of certain transfers subject to 
estate and gift tax treaties. Under section 7815(d)(14) of the Omnibus 
Budget Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat. 2106) 
certain special rules apply in the case of transfers governed by 
certain estate and gift tax treaties to which the United States is a 
party. In the case of the estate of, or gift by, an individual who was 
not a citizen or resident of the United States but was a resident of a 
foreign country with which the United States has a tax treaty with 
respect to estate, inheritance, or gift taxes, the amendments made by 
section 5033 of the Technical and Miscellaneous Revenue Act of 1988 
(Pub. L. 100-647, 102 Stat. 3342) do not apply to the extent such 
amendments would be inconsistent with the provisions of such treaty 
relating to estate, inheritance, or gift tax marital deductions. Under 
this rule, the estate may choose either the statutory deduction under 
section 2056A or the marital deduction allowed under the treaty. Thus, 
the estate may not avail itself of both the marital deduction under the 
treaty and the marital deduction under the QDOT provisions of section 
2056A and chapter 11 of the Internal Revenue Code with respect to the 
remainder of the marital property that is not deductible under the 
treaty. 

[[Page 43540]]



Sec. 20.2056A-2  Requirements for qualified domestic trust.

    (a) In general. In order to qualify as a qualified domestic trust 
(QDOT), the requirements of paragraphs (b) and (c) of this section, and 
the requirements of Sec. 20.2056A-2T(d), must be satisfied. The 
executor of the decedent's estate and the U.S. Trustee shall establish 
in such manner as may be prescribed by the Commissioner on the estate 
tax return and applicable instructions that these requirements have 
been satisfied or are being complied with. In order to constitute a 
QDOT, the trust must be maintained under the laws of a state of the 
United States or the District of Columbia, and the administration of 
the trust must be governed by the laws of a particular state of the 
United States or the District of Columbia. For purposes of this 
paragraph (a), a trust is maintained under the laws of a state of the 
United States or the District of Columbia if the records of the trust 
(or copies thereof) are kept in that state (or the District of 
Columbia). The trust may be established pursuant to an instrument 
executed under either the laws of a state of the United States or the 
District of Columbia or pursuant to an instrument executed under the 
laws of a foreign jurisdiction, such as a foreign will or trust, 
provided that such foreign instrument designates the law of a 
particular state of the United States or the District of Columbia as 
governing the administration of the trust, and such designation is 
effective under the law of the designated jurisdiction. In addition, 
the trust must constitute an ordinary trust, as defined in 
Sec. 301.7701-4(a) of this chapter, and not any other type of entity. 
For purposes of this paragraph, a trust will not fail to constitute an 
ordinary trust solely because of the nature of the assets transferred 
to that trust, regardless of its classification under Secs. 301.7701-2 
through 301.7701-4 of this chapter.
    (b) Qualified marital interest requirements--(1) Property passing 
to QDOT. If property passes from a decedent to a QDOT, the trust must 
qualify for the federal estate tax marital deduction under section 
2056(b)(5) (life estate with power of appointment), section 2056(b)(7) 
(qualified terminable interest property, including joint and survivor 
annuities under section 2056(b)(7)(C)), or section 2056(b)(8) 
(surviving spouse is the only noncharitable beneficiary of a charitable 
remainder trust), or meet the requirements of an estate trust as 
defined in Sec. 20.2056(c)-2(b)(1)(i) through (iii).
    (2) Property passing outright to spouse. If property does not pass 
from a decedent to a QDOT, but passes to a noncitizen surviving spouse 
in a form that meets the requirements for a marital deduction without 
regard to section 2056(d)(1)(A), and that is not described in paragraph 
(b)(1) of this section, the surviving spouse must either actually 
transfer the property, or irrevocably assign the property, to a trust 
(whether created by the decedent, the decedent's executor or by the 
surviving spouse) that meets the requirements of paragraph (c) of this 
section and the requirements of Sec. 20.2056A-2T(d) (pertaining, 
respectively, to statutory requirements and regulatory requirements 
imposed to ensure collection of tax) prior to the filing of the estate 
tax return for the decedent's estate and on or before the last date 
prescribed by law that the QDOT election may be made (see 
Sec. 20.2056A-3(a)).
    (3) Property passing under a nontransferable plan or arrangement. 
If property does not pass from a decedent to a QDOT, but passes under a 
plan or other arrangement that meets the requirements for a marital 
deduction without regard to section 2056(d)(1)(A) and whose payments 
are not assignable or transferable (see Sec. 20.2056A-4(c)), the 
property is treated as meeting the requirements of this section, and 
the requirements of Sec. 20.2056A-2T(d), if the requirements of 
Sec. 20.2056A-4(c) are satisfied. In addition, where an annuity or 
similar arrangement is described above except that it is assignable or 
transferable, see Sec. 20.2056A-4(b)(7).
    (c) Statutory requirements. The requirements of section 
2056A(a)(1)(A) and (B) must be satisfied. For purposes of that section, 
a domestic corporation is a corporation that is created or organized 
under the laws of the United States or under the laws of any state of 
the United States or the District of Columbia. The trustee required 
under that section is referred to herein as the ``U.S. Trustee''.
    (d) [Reserved]


Sec. 20.2056A-3  QDOT election.

    (a) General rule. Subject to the time period prescribed in section 
2056A(d), the election to treat a trust as a QDOT must be made on the 
last federal estate tax return filed before the due date (including 
extensions of time to file actually granted) or, if a timely return is 
not filed, on the first federal estate tax return filed after the due 
date. The election, once made, is irrevocable.
    (b) No partial elections. An election to treat a trust as a QDOT 
may not be made with respect to a specific portion of an entire trust 
that would otherwise qualify for the marital deduction but for the 
application of section 2056(d). However, if the trust is actually 
severed in accordance with the applicable requirements of 
Sec. 20.2056(b)-7(b)(2)(ii) prior to the due date for the election, a 
QDOT election may be made for any one or more of the severed trusts.
    (c) Protective elections. A protective election may be made to 
treat a trust as a QDOT only if at the time the federal estate tax 
return is filed, the executor of the decedent's estate reasonably 
believes that there is a bona fide issue that concerns either the 
residency or citizenship of the decedent, the citizenship of the 
surviving spouse, whether an asset is includible in the decedent's 
gross estate, or the amount or nature of the property the surviving 
spouse is entitled to receive. For example, if at the time the federal 
estate tax return is filed either the estate is involved in a bona fide 
will contest, there is uncertainty regarding the inclusion in the gross 
estate of an asset which, if includible, would be eligible for the QDOT 
election, or there is uncertainty regarding the status of the decedent 
as a resident alien or a nonresident alien for estate tax purposes, or 
a similar uncertainty regarding the citizenship status of the surviving 
spouse, a protective QDOT election may be made. The protective election 
is in addition to, and is not in lieu of, the requirements set forth in 
Sec. 20.2056A-4. The protective QDOT election must be made on a written 
statement signed by the executor under penalties of perjury and must be 
attached to the return described in paragraph (a) of this section, and 
must identify the specific assets to which the protective election 
refers and the specific basis for the protective election. However, the 
protective election may otherwise be defined by means of a formula 
(such as the minimum amount necessary to reduce the estate tax to 
zero). Once made, the protective election is irrevocable. For example, 
if a protective election is made because a bona fide question exists as 
to the includibility of an asset in the decedent's gross estate and it 
is later finally determined that the asset is so includible, the 
protective election becomes effective with respect to the asset and 
cannot thereafter be revoked.
    (d) Manner of election. The QDOT election under paragraph (a) of 
this section is made in the form and manner set forth in the decedent's 
estate tax return, including applicable instructions. 

[[Page 43541]]



Sec. 20.2056A-4  Procedures for conforming marital trusts and nontrust 
marital transfers to the requirements of a qualified domestic trust.

    (a) Marital trusts--(1) In general. If an interest in property 
passes from the decedent to a trust for the benefit of a noncitizen 
surviving spouse and if the trust otherwise qualifies for a marital 
deduction but for the provisions of section 2056(d)(1)(A), the property 
interest is treated as passing to the surviving spouse in a QDOT if the 
trust is reformed, either in accordance with the terms of the 
decedent's will or trust agreement or pursuant to a judicial 
proceeding, to meet the requirements of a QDOT. For this purpose, the 
requirements of a QDOT include all of the applicable requirements set 
forth in Sec. 20.2056A-2, and the requirements of Sec. 20.2056A-2T(d). 
A reformation pursuant to the terms of the decedent's will or trust 
instrument must be completed by the time prescribed (including 
extensions) for filing the decedent's estate tax return. For purposes 
of this paragraph (a), a return filed prior to the due date (including 
extensions) is considered filed on the last date that the return is 
required to be filed (including extensions), and a late return filed at 
any time after the due date is considered filed on the date that it is 
actually filed.
    (2) Judicial reformations. In general, a reformation pursuant to a 
judicial proceeding is permitted under this section if the reformation 
is commenced on or before the due date (determined with regard to 
extensions actually granted) for filing the return of tax imposed by 
chapter 11 of the Internal Revenue Code, regardless of the date that 
the return is actually filed. The reformation (either pursuant to a 
judicial proceeding or otherwise) must result in a trust that is 
effective under local law. The reformed trust may be revocable by the 
spouse, or otherwise be subject to the spouse's general power of 
appointment, provided that no person (including the spouse) has the 
power to amend the trust during the continued existence of the trust 
such that it would no longer qualify as a QDOT. Prior to the time that 
the judicial reformation is completed, the trust must be treated as a 
QDOT. Thus, the trustee of the trust is responsible for filing the Form 
706-QDT, paying any section 2056A estate tax that becomes due, and 
filing the annual statement required under Sec. 20.2056A-2T(d)(3), if 
applicable. Failure to comply with these requirements may cause the 
trust to be subject to the anti-abuse rule under Sec. 20.2056A-
2T(d)(1)(iv). In addition, if the judicial reformation is terminated 
prior to the time that the reformation is completed, the estate of the 
decedent is required to pay the increased estate tax imposed on the 
decedent's estate (plus interest and any applicable penalties) that 
becomes due at the time of such termination as a result of the failure 
of the trust to comply with section 2056(d). See section 6511 as to 
applicable time periods for credit or refund of tax.
    (3) Tolling of statutory assessment period. For the tolling of the 
statute of limitations in the case of a judicial reformation, see 
section 2056(d)(5)(B).
    (b) Nontrust marital transfers--(1) In general. Under section 
2056(d)(2)(B), if an interest in property passes outright from a 
decedent to a noncitizen surviving spouse either by testamentary 
bequest or devise, by operation of law, or pursuant to an annuity or 
other similar plan or arrangement, and such property interest otherwise 
qualifies for a marital deduction except that it does not pass in a 
QDOT, solely for purposes of section 2056(d)(2)(A), the property is 
treated as passing to the surviving spouse in a QDOT if the property 
interest is either actually transferred to a QDOT before the estate tax 
return is filed and on or before the last date prescribed by law that 
the QDOT election may be made, or is assigned to a QDOT under an 
enforceable and irrevocable written assignment made on or before the 
date on which the return is filed and on or before the last date 
prescribed by law that the QDOT election may be made. The transfer or 
assignment of property to a QDOT may be made by the surviving spouse, 
the surviving spouse's legal representative (if the surviving spouse is 
incompetent), or the personal representative of the surviving spouse's 
estate (if the surviving spouse has died). The QDOT to which the 
property is transferred may be created by the decedent (during life or 
by will), by the surviving spouse, or by the executor. For purposes of 
section 2056(d)(2)(B), if no property other than the property passing 
to the surviving spouse from the decedent is transferred to the QDOT, 
the transferee QDOT need not be in a form such that the property 
transferred to the QDOT would qualify for a marital deduction under 
section 2056(a). However, if other property is or has been transferred 
to the QDOT, 100 percent of the value of the transferee QDOT must 
qualify for the marital deduction under section 2056. For example, if 
the decedent, a U.S. citizen, bequeaths property to a trust that does 
not satisfy the requirements of section 2056(b)(5) or (7), or to a 
trust that does not qualify as an estate trust under Sec. 20.2056(c)-
2(b)(1)(i)-(iii), that trust cannot be used as a transferee QDOT by the 
surviving spouse, since after that trust is fully funded the portion of 
the value of the trust attributable to property bequeathed to the trust 
by the decedent will not qualify for a marital deduction under section 
2056. Similarly, if the decedent, a nonresident not a citizen of the 
United States, bequeaths foreign situs assets to a trust created under 
his will, the surviving spouse may not transfer U.S. situs assets 
passing to the spouse outside of the will to that trust under this 
paragraph. See Sec. 20.2056A-3(c) with respect to protective elections. 
See Sec. 20.2056A-3(a) with respect to the time limitations for making 
the QDOT election.
    (2) Form of transfer or assignment. A transfer or assignment of 
property to a QDOT must be in writing and otherwise be in accordance 
with all local law requirements for such assignment or transfer. The 
transfer or assignment may be of a specific asset or a group of assets, 
or a fractional share of either, or may be of a pecuniary amount. A 
transfer or assignment of less than an entire interest in an asset or a 
group of assets may be expressed by means of a formula (such as the 
minimum amount necessary to reduce the estate tax to zero). In the case 
of a transfer, a copy of the trust instrument evidencing the transfer 
must be submitted with the decedent's estate tax return. In the case of 
an assignment, a copy of the assignment must be submitted with the 
decedent's estate tax return.
    (3) Assets eligible for transfer or assignment. If a transfer or 
assignment is of a specific asset or group of assets, only assets 
included in the decedent's gross estate and passing from the decedent 
to the spouse (or the proceeds from the sale, exchange or conversion of 
such assets) may be transferred or assigned to the QDOT. The noncitizen 
surviving spouse may not transfer or assign to the QDOT property owned 
by the surviving spouse at the time of the decedent's death in lieu of 
property included in the decedent's gross estate that passes to the 
spouse (or in lieu of the proceeds from the sale, exchange or 
conversion of such includible assets). In addition, if only a portion 
of an asset is includible in the decedent's gross estate, the spouse 
may only transfer the portion that is so includible to the transferee 
trust under this paragraph (b)(3).
    (4) Pecuniary assignment--special rules. If the assignment is 
expressed in the form of a pecuniary amount (such as a fixed dollar 
amount or a formula designed to reduce the decedent's estate tax to 
zero), the assignment must specify that--

[[Page 43542]]

    (i) Assets actually transferred to the QDOT in satisfaction of the 
assignment have an aggregate fair market value on the date of actual 
transfer to the QDOT amounting to no less than the amount of the 
pecuniary transfer or assignment; or
    (ii) The assets actually transferred to the QDOT be fairly 
representative of appreciation or depreciation in the value of all 
property available for transfer to the QDOT between the valuation date 
and the date of actual transfer to the QDOT, if the assignment is to be 
satisfied by accounting for the assets on the basis of their fair 
market value as of some date before the date of actual transfer to the 
QDOT.
    (5) Transfer tax treatment of transfer or assignment. Property 
assigned or transferred to a QDOT pursuant to section 2056(d)(2)(B) is 
treated as passing from the decedent to a QDOT solely for purposes of 
section 2056(d)(2)(A). For all other purposes (e.g., income, gift, 
estate, generation-skipping transfer tax, and section 1491 excise tax), 
the surviving spouse is treated as the transferor of the property to 
the QDOT. However, the spouse is not considered the transferor of 
property to a QDOT if the transfer by the spouse constitutes a transfer 
that satisfies the requirements of section 2518(c)(3). For a special 
exception to the valuation rules of section 2702 in the case of a 
transfer by the surviving spouse to a QDOT, see Sec. 25.2702-1(c)(8) of 
this chapter.
    (6) Period for completion of transfer. Property irrevocably 
assigned but not actually transferred to the QDOT before the estate tax 
return is filed must actually be conveyed and transferred to the QDOT 
under applicable local law before the administration of the decedent's 
estate is completed. If there is no administration of the decedent's 
estate (because for example, none of the decedent's assets are subject 
to probate under local law), the conveyance must be made on or before 
the date that is one year after the due date (including extensions) for 
filing the decedent's estate tax return. If an actual transfer to the 
QDOT is not timely made, section 2056(d)(1)(A) applies and the marital 
deduction is not allowed. The executor of the decedent's estate (or 
other authorized legal representative) may request a private letter 
ruling from the Internal Revenue Service requesting an extension of the 
time for completing the conveyance or waiving the actual conveyance 
under specified circumstances under Sec. 301.9100-1(a) of this chapter.
    (7) Retirement accounts and annuities--(i) In general. An 
assignment otherwise in compliance with this paragraph (b) of rights 
under annuities or other similar arrangements that are assignable and 
thus, are not described in paragraph (c) of this section, is treated as 
a transfer of such property to the QDOT regardless of the method of 
payment actually elected under such annuity or plan.
    (ii) Individual retirement annuities. Individual retirement 
annuities described in section 408(b) are not assignable pursuant to 
section 408(b)(1) and thus, do not come within the purview of this 
paragraph (b)(7). See the procedures provided in paragraph (c) of this 
section.
    (iii) Individual retirement accounts. Unless the terms of the 
account provide otherwise, individual retirement accounts described in 
section 408(a) are assignable and subject to the provisions of this 
paragraph (b)(7). However, under paragraph (c) of this section, the 
surviving spouse may treat an individual retirement account as 
nonassignable and, therefore, eligible for the procedures in paragraph 
(c) of this section if the spouse timely complies with the requirements 
in paragraph (c) of this section.
    (iv) Other effects of assignment. The provisions of this paragraph 
(b)(7) apply solely for purposes of qualifying the annuity or account 
under the rules of Sec. 20.2056A-2 and this section. See, for example, 
section 408(d) and 4980A regarding the consequences of an assignment 
for purposes other than this paragraph (b)(7).
    (8) Protective assignment. A protective assignment of property to a 
QDOT may be made only if, at the time the federal estate tax return is 
filed, the executor of the decedent's estate reasonably believes that 
there is a bona fide issue that concerns either the residency or 
citizenship of the decedent, the citizenship of the surviving spouse, 
whether all or a portion of an asset is includible in the decedent's 
gross estate, or the amount or nature of the property the surviving 
spouse is entitled to receive. For example, if at the time the federal 
estate tax return is filed, either the estate is involved in a bona 
fide will contest, there is uncertainty regarding the inclusion in the 
gross estate of an asset which, if includible, would be eligible for 
the QDOT election, or there is uncertainty regarding the status of the 
decedent as a resident alien or a nonresident alien for estate tax 
purposes, or a similar uncertainty regarding the citizenship status of 
the surviving spouse, a protective assignment may be made. The 
protective assignment must be made on a written statement signed by the 
assignor under penalties of perjury on or before the date prescribed 
under paragraph (b)(1) of this section, and must identify the specific 
assets to which the assignment refers and the specific basis for the 
protective assignment. However, the protective assignment may otherwise 
be defined by means of a formula (such as the minimum amount necessary 
to reduce the estate tax to zero). Once made, the protective assignment 
cannot be revoked. For example, if a protective assignment is made 
because a bona fide question exists as to the includibility of an asset 
in the decedent's gross estate and it is later finally determined that 
the asset is so includible, the protective assignment becomes effective 
with respect to the asset and cannot thereafter be revoked. Protective 
assignments are, in all events, subject to paragraph (b)(6) of this 
section. A copy of the protective assignment must be submitted with the 
decedent's estate tax return.
    (c) Nonassignable annuities and other arrangements--(1) Definition 
and general rule. For purposes of this section, a nonassignable annuity 
or other arrangement means a plan, annuity, or other arrangement 
(whether qualified or not qualified under part I of subchapter D of 
chapter 1 of subtitle A of the Internal Revenue Code) that qualifies 
for the marital deduction but for section 2056(d)(1)(A), and whose 
payments are not assignable or transferable to the QDOT under either 
federal law (see, e.g., section 401(a)(13)), state law, foreign law, or 
the terms of the plan or arrangement itself. For purposes of this 
paragraph (c), a surviving spouse's interest as beneficiary of an 
individual retirement annuity described in section 408(b) is a 
nonassignable annuity or other arrangement. See section 408(b)(1). For 
purposes of this paragraph (c), a surviving spouse's interest as 
beneficiary of an individual retirement account described in section 
408(a), although assignable under that section, is considered to be a 
nonassignable annuity or other arrangement eligible for the procedures 
contained in this paragraph (c), at the option of the surviving spouse, 
if the requirements of this paragraph are otherwise satisfied. See 
paragraph (b)(7) of this section if the spouse elects to treat the 
account as assignable. In the case of a plan, annuity, or other 
arrangement which is not assignable or transferable (or is treated as 
such), the property passing under the plan from the decedent is treated 
as meeting the requirements Sec. 20.2056A-2, and the requirements of 
Sec. 20.2056A-2T(d) (pertaining, 

[[Page 43543]]
respectively, to general requirements, qualified marital interest 
requirements, statutory requirements, and requirements to ensure 
collection of the tax) if the requirements of either paragraph (c)(2) 
or (3) of this section are satisfied. Thus, the property will be 
treated as passing in the form of a QDOT, notwithstanding that the 
spouse does not irrevocably transfer or assign the annuity or other 
payment to the QDOT as provided in paragraph (b) of this section. The 
Commissioner will prescribe by administrative guidance the extent, if 
any, to which the provisions of this paragraph (c) apply to a rollover 
from a qualified trust to an eligible retirement plan within the 
meaning of section 402(c) or a distribution from an individual 
retirement account or an individual retirement annuity that is paid 
into an individual retirement account or an individual retirement 
annuity within the meaning of section 408(d)(3).
    (2) Agreement to remit section 2056A estate tax on corpus portion 
of each annuity payment. The requirements of this paragraph (c)(2) are 
satisfied if--
    (i) The noncitizen surviving spouse agrees to pay on an annual 
basis, as described in paragraph (c)(6)(i) of this section, the estate 
tax imposed under section 2056A(b)(1) due on the corpus portion, as 
defined in paragraph (c)(4) of this section, of each nonassignable 
annuity or other payment received under the plan or arrangement. 
However, for purposes of this paragraph (c)(2), if the financial 
circumstances of the spouse are such that an amount equal to all or a 
portion of the corpus portion of a nonassignable annuity payment 
received by the spouse would be subject to a hardship exemption (as 
defined in Sec. 20.2056A-5(c)) if paid from a QDOT, then all or a 
corresponding part of the corpus portion will be exempt from the tax 
payment requirement under this paragraph (c)(2);
    (ii) The executor of the decedent's estate files with the estate 
tax return the Information Statement described in paragraph (c)(5) of 
this section;
    (iii) The executor files with the estate tax return the Agreement 
To Pay Section 2056A Estate Tax described in paragraph (c)(6) of this 
section; and
    (iv) The executor makes the election under Sec. 20.2056A-3 with 
respect to the nonassignable annuity or other payment.
    (3) Agreement to roll over corpus portion of annuity payment to 
QDOT. The requirements of this paragraph (c)(3) are satisfied if--
    (i) The noncitizen surviving spouse agrees to roll over and 
transfer, within the time prescribed under paragraph (c)(7)(i) of this 
section, the corpus portion of each annuity payment to a QDOT, whether 
the QDOT is created by the decedent's will, the executor of the 
decedent's estate, or the surviving spouse. However, for purposes of 
this section, if the financial circumstances of the spouse are such 
that an amount equal to all or a portion of the corpus portion of a 
nonassignable annuity payment received by the spouse would be subject 
to a hardship exemption (as defined in Sec. 20.2056A-5(c)) if paid from 
a QDOT, then all or a corresponding part of the corpus portion will be 
exempt from the rollover requirement under this paragraph (c)(3);
    (ii) A QDOT for the benefit of the surviving spouse is established 
prior to the date that the estate tax return is filed and on or prior 
to the last date prescribed by law that the QDOT election may be made;
    (iii) The executor of the decedent's estate files with the estate 
tax return the Information Statement described in paragraph (c)(5) of 
this section;
    (iv) The executor files with the estate tax return the Agreement To 
Roll Over Annuity Payments described in paragraph (c)(7) of this 
section; and
    (v) The executor makes the election under Sec. 20.2056A-3 with 
respect to the nonassignable annuity or other payment. See 
Sec. 20.2056A-5(c)(3)(iv)(A), regarding distributions from the QDOT 
reimbursing the spouse for income taxes paid (either by actual payment 
or withholding) by the spouse with respect to amounts transferred to 
the QDOT pursuant to this paragraph (c)(3).
    (4) Determination of corpus portion--(i) Corpus portion. For 
purposes of this paragraph (c), the corpus portion of each 
nonassignable annuity or other payment is the corpus amount of the 
annual payment divided by the total annual payment.
    (ii) Corpus amount. (A) The corpus amount of the annual payment is 
determined in accordance with the following formula:
[GRAPHIC][TIFF OMITTED]TR22AU95.008

    (B) The total present value of the annuity or other payment is the 
present value of the nonassignable annuity or other payment as of the 
date of the decedent's death, determined in accordance with the 
interest rates and mortality data prescribed by section 7520. The 
expected annuity term is the number of years that would be required for 
the scheduled payments to exhaust a hypothetical fund equal to the 
present value of the scheduled payments. This is determined by first 
dividing the total present value of the payments by the annual payment. 
From the quotient so obtained, the expected annuity term is derived by 
identifying the term of years that corresponds to the annuity factor 
equal to the quotient. This is determined by using column 1 of Table B, 
for the applicable interest rate, contained in Publication 1457, Alpha 
Volume. A copy of this publication may be purchased from the 
Superintendent of Documents, United States Government Printing Office, 
Washington, DC 20402. If the quotient obtained falls between two terms, 
the longer term is used.
    (5) Information Statement--(i) In general. In order for a 
nonassignable annuity or other payment described in this paragraph (c) 
to qualify under either paragraph (c) (2) or (3) of this section, the 
Information Statement described in paragraph (c)(5)(ii) of this section 
must be filed with the decedent's federal estate tax return. The 
Information Statement must be signed under penalties of perjury by both 
the executor of the decedent's estate and by the surviving spouse of 
the decedent (or by the legal representative of the surviving spouse if 
the surviving spouse is legally incompetent to sign the statement). The 
Statement must contain all of the information prescribed by this 
paragraph (c)(5).
    (ii) Annuity source information--(A) Employment-related annuity. If 
the nonassignable annuity or other payment is employment-related, the 
following information must be provided--
    (1) The name and address of the employer;
    (2) The date of retirement or other separation from employment of 
the decedent;
    (3) The name and address of the pension fund, insurance company, or 
other obligor that is paying the annuity (or similar payment); and 

[[Page 43544]]

    (4) The identification number, if any, that the obligor has 
assigned to the annuity or other payment.
    (B) Annuity not employment-related. If the nonassignable annuity or 
other payment is not employment-related, the following information must 
be provided--
    (1) The name and address of the person or entity paying the 
nonassignable annuity or other payment;
    (2) The date of acquisition of the nonassignable annuity contract 
by the decedent or by the decedent and the surviving spouse; and
    (3) The identification number, if any, that the obligor has 
assigned to the nonassignable annuity or other payment.
    (iii) The total annuity amount payable each year. The total amount 
payable annually under the nonassignable annuity or other arrangement, 
including a description of whether the annuity is payable monthly, 
quarterly, or at some other interval, and a description of any 
scheduled changes in the annuity payout amount.
    (iv) The duration of the annuity. A description of the term of the 
nonassignable annuity or other payment in years, if it is determined by 
a term certain, and the name, address, and birthdate of any measuring 
life if the nonassignable annuity or other payment is determined by one 
or more lives.
    (v) The market interest rate under section 7520. The applicable 
interest rate as determined under section 7520.
    (vi) Determination of corpus portion of each payment (in accordance 
with paragraph (c)(4) of this section). The following items are 
required in order to determine the corpus portion of each payment--
    (A) The present value of the nonassignable annuity or other payment 
as of the decedent's death;
    (B) The expected annuity term;
    (C) The corpus amount of the annual annuity payments (paragraph 
(c)(5)(vi)(A) of this section divided by paragraph (c)(5)(vi)(B) of 
this section); and
    (D) The corpus portion of the annual payments (paragraph 
(c)(5)(vi)(C) of this section divided by the total amount payable 
annually).
    (vii) Recipient QDOT. In the case of an agreement to rollover under 
paragraph (c)(3) of this section, the following must be provided--
    (A) The name and address of the trustee of the QDOT who is the U.S. 
Trustee; and
    (B) The name and taxpayer identification number of the QDOT.
    (viii) Certification statement. The executor of the decedent's 
estate and the surviving spouse of the decedent (or the legal 
representative of the surviving spouse if the surviving spouse is 
legally incompetent to so certify) must each sign a Certification 
Statement as follows:

    Under penalties of perjury, I hereby certify that, to the best 
of my knowledge and belief, the information reported in this 
Information Statement is true, correct and complete.

    (6) Agreement to pay section 2056A estate tax--(i) Payment of 
section 2056A estate tax. The tax payable under paragraph (c)(2) of 
this section is payable on an annual basis, commencing in the calendar 
year following the calendar year of the receipt by the surviving spouse 
of the spouse's first annuity payment. Form 706QDT and the payment are 
due on April 15th of each year following the calendar year in which an 
annuity payment is received except that, in the year of the deceased 
spouse's death, the Form 706-QDT and the payment are not due prior to 
the due date, including extensions, for filing the deceased spouse's 
estate tax return, or if no return is filed, no later than 9 months 
from the date of the deceased spouse's death; and, in the year of the 
surviving spouse's death, the Form 706-QDT must be filed and the 
payment made no later than 9 months from the date of the surviving 
spouse's death. See Sec. 20.2056A-11 for extensions of time for filing 
Form 706-QDT and paying the section 2056A estate tax.
    (ii) Agreement. In order for a nonassignable annuity or other 
payment described in this paragraph (c) to qualify under paragraph 
(c)(2) of this section, the executor of the decedent's estate must file 
with the estate tax return the following Agreement To Pay Section 2056A 
Estate Tax, which must be signed by the surviving spouse of the 
decedent (or by the surviving spouse's legal representative if the 
surviving spouse is legally incompetent to sign the agreement):

    I [  name  ] hereby agree that I will report all annuity 
payments received under the [name of plan or arrangement] on Form 
706-QDT for the calendar year and remit, on an annual basis, to the 
Internal Revenue Service the estate tax that is imposed under 
section 2056A(b)(1) of the Internal Revenue Code on the corpus 
portion of each annuity payment (as defined in Sec. 20.2056A-4(c)(4) 
of the Estate Tax Regulations) received under the plan during the 
calendar year. I also agree that Form 706-QDT is to be filed no 
later than April 15th of the year following the calendar year in 
which any annuity payments are received except that: in the case of 
annuity payments received in the year of my spouse's death, Form 
706-QDT and the payment shall not be due prior to the due date, 
including extensions, for filing my spouse's estate tax return or, 
if no return is filed, no later than 9 months from the date of my 
spouse's death (except if I am granted an extension of time to file 
Form 706-QDT under the provisions of Sec. 20.2056A-11); and in the 
year of my death, the Form 706-QDT must be filed and the payment 
made no later than the date my estate tax return is filed (or if no 
return is filed, no later than 9 months from the date of my death). 
I further agree that if I fail to timely file Form 706-QDT or to 
timely pay the tax imposed on the corpus portion of any annuity 
payment (determined after any extensions of time to pay granted to 
me under the provisions of Sec. 20.2056A- 11), I may become 
immediately liable to pay the amount of the tax determined by 
application of section 2056A(b)(1) on the entire remaining present 
value of the annuity, calculated as of the beginning of the year in 
which the payment was received with respect to which I failed to 
timely pay the tax or failed to timely file the return. However, I 
may make an application for relief under Sec. 301.9100-1 of the 
Procedure and Administration Regulations, from the consequences of 
failing to timely file the Form 706-QDT or failing to timely pay the 
tax on the corpus portion. [The following sentence is applicable 
only in cases where the plan or arrangement is established and 
administered by a person or an entity that is located outside of the 
United States.] I agree, at the request of the District Director, 
[or the Assistant Commissioner (International) in the case of a 
surviving spouse of a nonresident noncitizen decedent or a surviving 
spouse of a United States citizen who died domiciled outside the 
United States] to enter into a security agreement to secure my 
undertakings under this agreement.

    (7) Agreement to roll over annuity payments--(i) Roll over of 
corpus portion. Beginning in the calendar year of the receipt by the 
surviving spouse of the spouse's first annuity payment, the corpus 
portion of each annuity payment, as determined under paragraph (c)(4) 
of this section, must, within 60 days of receipt, be transferred to a 
QDOT. In addition, all annuity payments received during the calendar 
year must be reported on Form 706-QDT no later than April 15th of the 
year following the year in which the annuity payments are received, 
except that in the year of the surviving spouse's death, the Form 706-
QDT must be filed no later than the date the estate tax return is filed 
(or if no return is filed, no later than 9 months from the date of the 
surviving spouse's death). See Sec. 20.2056A-11 for extensions of time 
for filing Form 706-QDT.
    (ii) Agreement. In order for a nonassignable annuity or other 
payment described in this paragraph (c) to qualify under paragraph 
(c)(3) of this section, the executor of the decedent's estate must file 
with the estate tax return the following Agreement To Roll Over Annuity 
Payments, which must be 

[[Page 43545]]
signed by the surviving spouse of the decedent (or by the legal 
representative of the surviving spouse if the surviving spouse is 
legally incompetent to sign the agreement):

    I [  name  ] hereby agree that within 60 days of receipt of each 
annuity payment paid under the [name of plan or arrangement], I will 
transfer an amount equal to ______ percent (the corpus portion 
determined under Sec. 20.2056A-4(c)(4) of the Estate Tax 
Regulations) of each annuity payment to [identify the QDOT]. 
Further, I will report all annuity payments received during the 
calendar year under the [name of plan or arrangement] on Form 706-
QDT including a schedule of transfers to the [identify the QDOT]. I 
also agree that Form 706-QDT is to be filed no later than April 15th 
of the year following the year in which any annuity payments are 
received except that: in the case of annuity payments received in 
the year of my spouse's death, Form 706-QDT shall not be due prior 
to the due date, including extensions, for filing my spouse's estate 
tax return, or, if no return is filed, no later than 9 months from 
the date of my spouse's death (except if I am granted an extension 
of time to file Form 706-QDT under the provisions of Sec. 20.2056A-
11); and in the year of my death, the Form 706-QDT must be filed no 
later than the date my estate tax return is filed (or if no return 
is filed, no later than 9 months from the date of my death), and 
except if I am granted an extension of time to file Form 706-QDT 
under the provisions of Sec. 20.2056A-11. I further agree that if I 
fail to timely transfer any required amount with respect to any 
annuity payment, or fail to timely file Form 706-QDT reporting the 
transfers for any year, I may become immediately liable to pay the 
amount of the tax determined by application of section 2056A(b)(1) 
on the entire remaining present value of the annuity, calculated as 
of the beginning of the year in which the payment was received with 
respect to which I failed to make the timely transfer or timely file 
a return. However, I may make an application for relief under 
Sec. 301.9100-1 of the Procedure and Administration Regulations, 
from the consequences of failing to timely file Form 706-QDT or 
failing to timely transfer the corpus portion of any annuity payment 
to the QDOT. [The following sentence is applicable only in cases 
where the plan or arrangement is established and administered by a 
person or an entity that is located outside of the United States.] I 
agree, at the request of the District Director [or the Assistant 
Commissioner (International) in the case of a surviving spouse of a 
nonresident noncitizen decedent or a surviving spouse of a United 
States citizen who died domiciled outside the United States] to 
enter into a security agreement to secure my undertakings under this 
agreement.

    (d) Examples. The provisions of this section are illustrated by the 
following examples. In each of the following examples the decedent, D, 
a citizen of the United States, died after August 22, 1995, and D's 
surviving spouse, S, is not a United States citizen at the time of D's 
death.

    Example 1. Transfer and assignment of probate and nonprobate 
property to QDOT. (i) S is the beneficiary of the following probate 
and nonprobate assets included in D's gross estate:

                                                                        
                                                                        
Pecuniary bequest under will...............................     $400,000
Proceeds of life insurance.................................      200,000
D's interest in property owned jointly with S includible in             
 the gross estate under Sec.  2040(a)......................      300,000
Devise of real property under will.........................      100,000
                                                            ------------
    Total..................................................   $1,000,000

    (ii) Before the estate tax return for D's estate is filed and 
before the date that the QDOT election must be made, S creates a 
QDOT pursuant to which all income is payable to S for life and the 
remainder is distributable to S's children. S retains a power of 
appointment over the disposition of the remainder to ensure that S 
does not make an immediate gift of the remainder of the trust. Also, 
before the estate tax return is filed and before the date that the 
QDOT election must be made, S transfers the life insurance proceeds 
and the specifically devised real property to the QDOT. S decides 
not to transfer the property that had been jointly owned to the 
QDOT. Because S has not received distribution of the pecuniary 
bequest before D's estate tax return is filed and before the date 
that the QDOT election must be made, S irrevocably assigns the 
interest in the pecuniary bequest to the QDOT. Assume that the 
pecuniary bequest is in fact transferred by S to the QDOT before the 
estate administration is concluded. D's executor makes a QDOT 
election on the estate tax return for the $700,000 in property that 
S has transferred and assigned to the QDOT. A marital deduction of 
$700,000 is allowed to D's estate assuming the estate tax return is 
filed and the QDOT election is made within the time limitation 
prescribed in Sec. 20.2056A-3(a). No marital deduction is allowed 
for the $300,000 interest in jointly-owned property not transferred 
to the QDOT.
    Example 2. Formula assignment. Under the terms of D's will, the 
entire probate estate passes outright to S. Prior to the date D's 
estate tax return is filed and before the date that the QDOT 
election must be made, S establishes a QDOT and S executes an 
irrevocable assignment in which S assigns to the QDOT, ``that 
portion of the gross estate necessary to reduce the estate tax to 
zero, taking into account all available credits and deductions.'' 
The assignment meets the requirements of paragraph (b) of this 
section, assuming that the QDOT is funded by the time that 
administration of D's estate is completed.
    Example 3. Jointly owned property. At the time of D's death, D 
and S hold real property as joint tenants with right of 
survivorship. In accordance with section 2056(d)(1)(B), section 
2040(a), and Sec. 20.2056A-8(a), 60 percent of the value of the 
property is included in D's gross estate. S establishes a QDOT and, 
prior to the date the estate tax return is filed and before the date 
that the QDOT election must be made, S transfers a 60 percent 
interest in the real property to the QDOT. The transfer satisfies 
the requirements of paragraph (b) of this section.
    Example 4. Computation of corpus portion of annuity payment. (i) 
At the time of D's death, D is a participant in an employees' 
pension plan described in section 401(a). On D's death, D's spouse 
S, a resident of the United States, becomes entitled to receive a 
survivor's annuity of $72,000 per year, payable monthly, for life. 
At the time of D's death, S is age 60. Assume that under section 
7520, the appropriate discount rate to be used for valuing annuities 
in the case of this decedent is 9 percent. The annuity factor at 9 
percent for a person age 60 is 8.3031. The adjustment factor at 9 
percent for monthly payments is 1.0406. Accordingly, the right to 
receive $72,000 a year on a monthly basis is equal to the right to 
receive $74,923 ($72,000  x  1.0406) on an annual basis.
    (ii) The corpus portion of each annuity payment received by S is 
determined as follows. The first step is to determine the annuity 
factor for the number of years that would be required to exhaust a 
hypothetical fund that has a present value and a payout 
corresponding to S's interest in the payments under the plan, 
determined as follows:

(A) Present value of S's annuity: $74,923 x 8.3031 = $622,093
(B) Annuity Factor for Expected Annuity Term: $622,093/$74,923 = 
8.3031

    (iii) The second step is to determine the number of years that 
would be required for S's annuity to exhaust a hypothetical fund of 
$622,093. The term certain annuity factor of 8.3031 falls between 
the annuity factors for 15 and 16 years in a 9 percent term certain 
annuity table (Column 1 of Table B, Publication 1457 Alpha Volume 
which may be purchased from the Superintendent of Documents, United 
States Government Printing Office, Washington, DC 20402). 
Accordingly, the expected annuity term is 16 years.
    (iv) The third step is to determine the corpus amount by 
dividing the expected term of 16 years into the present value of the 
hypothetical fund as follows:

Corpus amount of annual payment: $622,093/16 = $38,881

    (v) In the fourth step, the corpus portion of each annuity 
payment is determined by dividing the corpus amount of each annual 
payment by the annual annuity payment as follows:

Corpus portion of each annuity payment: $38,881/$74,923 = .52

    (vi) Accordingly, 52 percent of each payment to S is deemed to 
be a distribution of corpus. A marital deduction is allowed for 
$622,093, the present value of the annuity as of D's date of death, 
if either: S agrees to roll over the corpus portion of each payment 
to a QDOT and the executor files the Information Statement described 
in paragraph (c)(5) of this section and the Roll Over Agreement 
described in paragraph (c)(7) of this section; or S agrees to pay 
the tax due on the corpus portion of each payment and the executor 
files the Information Statement described in paragraph (c)(5) of 
this section and the Payment Agreement described in paragraph (c)(6) 
of this section. 

[[Page 43546]]

    Example 5. Transfer to QDOT subject to gift tax. D's will 
bequeaths $700,000 outright to S. The bequest qualifies for a 
marital deduction under section 2056(a) except that it does not pass 
in a QDOT. S creates an irrevocable trust that meets the 
requirements for a QDOT and transfers the $700,000 to the QDOT. The 
QDOT instrument provides that S is entitled to all the income from 
the QDOT payable at least annually and that, upon the death of S, 
the property remaining in the QDOT is to be distributed to the 
grandchildren of D and S in equal shares. The trust instrument 
contains all other provisions required to qualify as a QDOT. On D's 
estate tax return, D's executor makes a QDOT election under section 
2056A(a)(3). Solely for purposes of the marital deduction, the 
property is deemed to pass from D to the QDOT. D's estate is 
entitled to a marital deduction for the $700,000 value of the 
property passing from D to S. S's transfer of property to the QDOT 
is treated as a gift of the remainder interest for gift tax purposes 
because S's transfer creates a vested remainder interest in the 
grandchildren of D and S. Accordingly, as of the date that S 
transfers the property to the QDOT, a gift tax is imposed on the 
present value of the remainder interest. See Sec. 25.2702-1(c)(8) of 
this chapter exempting S's transfer from the special valuation rules 
contained in section 2702. At S's death, S is treated as the 
transferor of the property into the trust for estate tax and 
generation-skipping transfer tax purposes. See, e.g., sections 2036 
and 2652(a)(1). The trust is not eligible for a reverse QTIP 
election by D's estate under section 2652(a)(3) because a QTIP 
election cannot be made for the QDOT. This is so because the marital 
deduction is allowed under section 2056(a) for the outright bequest 
to the spouse and the spouse is then separately treated as the 
transferor of the property to the QDOT.


Sec. 20.2056A-5  Imposition of section 2056A estate tax.

    (a) In general. An estate tax is imposed under section 2056A(b)(1) 
on the occurrence of a taxable event, as defined in section 
2056A(b)(9). The tax is generally equal to the amount of estate tax 
that would have been imposed if the amount involved in the taxable 
event had been included in the decedent's taxable estate and had not 
been deductible under section 2056. See section 2056A(b)(3) and 
paragraph (c) of this section for certain exceptions from taxable 
events.
    (b) Amounts subject to tax--(1) Distribution of principal during 
the spouse's lifetime. If a taxable event occurs during the noncitizen 
surviving spouse's lifetime, the amount on which the section 2056A 
estate tax is imposed is the amount of money and the fair market value 
of the property that is the subject of the distribution (including 
property distributed from the trust pursuant to the exercise of a power 
of appointment), including any amount withheld from the distribution by 
the U.S. Trustee to pay the tax. If, however, the tax is not withheld 
by the U.S. Trustee but is paid by the U.S. Trustee out of other assets 
of the QDOT, an amount equal to the tax so paid is treated as an 
additional distribution to the spouse in the year that the tax is paid.
    (2) Death of surviving spouse. If a taxable event occurs as a 
result of the death of the surviving spouse, the amount subject to tax 
is the fair market value of the trust assets on the date of the 
spouse's death (or alternate valuation date if applicable). See also 
section 2032A. Any corpus portion amounts, within the meaning of 
Sec. 20.2056A-4(c)(4)(i), remaining in a QDOT upon the surviving 
spouse's death, are subject to tax under section 2056A(b)(1)(B), as 
well as any residual payments resulting from a nonassignable plan or 
arrangement that, upon the surviving spouse's death, are payable to the 
spouse's estate or to successor beneficiaries.
    (3) Trust ceases to qualify as QDOT. If a taxable event occurs as a 
result of the trust ceasing to qualify as a QDOT (for example, the 
trust ceases to have at least one U.S. Trustee), the amount subject to 
tax is the fair market value of the trust assets on the date of 
disqualification.
    (c) Distributions and dispositions not subject to tax--(1) 
Distributions of principal on account of hardship. Section 
2056A(b)(3)(B) provides an exemption from the section 2056A estate tax 
for distributions to the surviving spouse on account of hardship. A 
distribution of principal is treated as made on account of hardship if 
the distribution is made to the spouse from the QDOT in response to an 
immediate and substantial financial need relating to the spouse's 
health, maintenance, education, or support, or the health, maintenance, 
education, or support of any person that the surviving spouse is 
legally obligated to support. A distribution is not treated as made on 
account of hardship if the amount distributed may be obtained from 
other sources that are reasonably available to the surviving spouse; 
e.g., the sale by the surviving spouse of personally owned, publicly 
traded stock or the cashing in of a certificate of deposit owned by the 
surviving spouse. Assets such as closely held business interests, real 
estate and tangible personalty are not considered sources that are 
reasonably available to the surviving spouse. Although a hardship 
distribution of principal is exempt from the section 2056A estate tax, 
it must be reported on Form 706-QDT even if it is the only distribution 
that occurred during the filing period. See Sec. 20.2056A-11 regarding 
filing requirements for Form 706-QDT.
    (2) Distributions of income to the surviving spouse. Section 
2056A(b)(3)(A) provides an exemption from the section 2056A estate tax 
for distributions of income to the surviving spouse. In general, for 
purposes of section 2056A(b)(3)(A), the term income has the same 
meaning as is provided in section 643(b), except that income does not 
include capital gains. In addition, income does not include any other 
item that would be allocated to corpus under applicable local law 
governing the administration of trusts irrespective of any specific 
trust provision to the contrary. In cases where there is no specific 
statutory or case law regarding the allocation of such items under the 
law governing the administration of the QDOT, the allocation under this 
paragraph (c)(2) will be governed by general principles of law 
(including but not limited to any uniform state acts, such as the 
Uniform Principal and Income Act, or any Restatements of applicable 
law). Further, except as provided in this paragraph (c)(2) or in 
administrative guidance published by the Internal Revenue Service, 
income does not include items constituting income in respect of a 
decedent (IRD) under section 691. However, in cases where a QDOT is 
designated by the decedent as a beneficiary of a pension or profit 
sharing plan described in section 401(a) or an individual retirement 
account or annuity described in section 408, the proceeds of which are 
payable to the QDOT in the form of an annuity, any payments received by 
the QDOT may be allocated between income and corpus using the method 
prescribed under Sec. 20.2056A-4(c) for determining the corpus and 
income portion of an annuity payment.
    (3) Certain miscellaneous distributions and dispositions. Certain 
miscellaneous distributions and dispositions of trust assets are exempt 
from the section 2056A estate tax, including but not limited to the 
following--
    (i) Payments for ordinary and necessary expenses of the QDOT 
(including bond premiums and letter of credit fees);
    (ii) Payments to applicable governmental authorities for income tax 
or any other applicable tax imposed on the QDOT (other than a payment 
of the section 2056A estate tax due on the occurrence of a taxable 
event as described in paragraph (b) of this section); 

[[Page 43547]]

    (iii) Dispositions of trust assets by the trustees (such as sales, 
exchanges, or pledging as collateral) for full and adequate 
consideration in money or money's worth; and
    (iv) Pursuant to section 2056A(b)(15), amounts paid from the QDOT 
to reimburse the surviving spouse for any tax imposed on the spouse 
under Subtitle A of the Internal Revenue Code on any item of income of 
the QDOT to which the surviving spouse is not entitled under the terms 
of the trust. Such distributions include (but are not limited to) 
amounts paid from the QDOT to reimburse the spouse for income taxes 
paid by the spouse (either by actual payment or through withholding) 
with respect to amounts received from a nonassignable annuity or other 
arrangement that are transferred by the spouse to a QDOT pursuant to 
Sec. 20.2056A- 4(c)(3); and income taxes paid by the spouse (either by 
actual payment or through withholding) with respect to amounts received 
in a lump sum distribution from a qualified plan if the lump sum 
distribution is assigned by the surviving spouse to a QDOT. For 
purposes of this paragraph (c)(3)(iv), the amount of attributable tax 
eligible for reimbursement is the difference between the actual income 
tax liability of the spouse and the spouse's income tax liability 
determined as if the item had not been included in the spouse's gross 
income in the applicable taxable year.


Sec. 20.2056A-6  Amount of tax.

    (a) Definition of tax. Section 2056A(b)(2) provides for the 
computation of the section 2056A estate tax. For purposes of sections 
2056A(b)(2)(A) (i) and (ii), in determining the tax that would have 
been imposed under section 2001 on the estate of the first decedent, 
the rates in effect on the date of the first decedent's death are used. 
For this purpose, the provisions of section 2001(c)(2) (pertaining to 
phaseout of graduated rates and unified credit) apply. In addition, for 
purposes of sections 2056A(b)(2)(A) (i) and (ii), the tax which would 
have been imposed by section 2001 on the estate of the decedent means 
the net tax determined under section 2001 or 2101, as the case may be, 
after allowance of any allowable credits, including the unified credit 
allowable under section 2010, the credit for state death taxes under 
section 2011, the credit for tax on prior transfers under section 2013, 
and the credit for foreign death taxes under section 2014. See 
paragraph (b)(4) of this section regarding the application of the 
credits under sections 2011 and 2014. In the case of a decedent 
nonresident not a citizen of the United States, the applicable credits 
are determined under section 2102. The estate tax (net of any 
applicable credits) imposed under section 2056A(b)(1) constitutes an 
estate tax for purposes of section 691(c)(2)(A).
    (b) Benefits allowed in determining amount of section 2056A estate 
tax--(1) General rule. Section 2056A(b)(10) provides for the allowance 
of certain benefits in computing the section 2056A estate tax. Except 
as provided in this section, the rules of each of the credit, deduction 
and deferral provisions, as provided in the Internal Revenue Code must 
be complied with.
    (2) Treatment as resident. For purposes of section 2056A(b)(10)(A), 
a noncitizen spouse is treated as a resident of the United States for 
purposes of determining whether the QDOT property is includible in the 
spouse's gross estate under chapter 11 of the Internal Revenue Code, 
and for purposes of determining whether any of the credits, deductions 
or deferral provisions are allowable with respect to the QDOT property 
to the estate of the spouse.
    (3) Special rule in the case of trusts described in section 
2056(b)(8). In the case of a QDOT in which the spouse's interest 
qualifies for a marital deduction under section 2056(b)(8), the 
provisions of section 2056A(b)(10)(A) apply in determining the 
allowance of a charitable deduction in computing the section 2056A 
estate tax, notwithstanding that the QDOT is not includible in the 
spouse's gross estate.
    (4) Credit for state and foreign death taxes. If the assets of the 
QDOT are included in the surviving spouse's gross estate for federal 
estate tax purposes, or would have been so includible if the spouse had 
been a United States resident, and state or foreign death taxes are 
paid by the spouse's estate with respect to the QDOT, the taxes paid by 
the spouse's estate with respect to the QDOT are creditable, to the 
extent allowable under section 2011 or 2014, as applicable, in 
computing the section 2056A estate tax. In addition, state or foreign 
death taxes previously paid by the decedent/transferor's estate are 
also creditable in computing the section 2056A estate tax to the extent 
allowable under sections 2011 and 2014. Specifically, the tax that 
would have been imposed on the decedent's estate if the taxable estate 
had been increased by the value of the QDOT assets on the spouse's 
death plus the amount involved in prior taxable events (section 
2056A(b)(2)(A)(i)), is determined after allowance of a credit equal to 
the lesser of the state or foreign death tax previously paid by the 
decedent's estate, or the amount prescribed under section 2011(b) or 
2014(b) computed based on a taxable estate increased by such amounts. 
Similarly, the tax that would have been imposed on the decedent's 
estate if the taxable estate had been increased only by the amount 
involved in prior taxable events (section 2056A(b)(2)(A)(ii)) is 
determined after allowance of a credit equal to the lesser of the state 
or foreign death tax previously paid by the decedent's estate, or the 
amount prescribed under section 2011(b) or 2014(b) computed based on a 
taxable estate increased by the amount involved in such prior taxable 
events. See paragraph (d), Example 2, of this section.
    (5) Alternate valuation and special use valuation--(i) In general. 
In order to claim the benefits of alternate valuation under section 
2032, or special use valuation under section 2032A, for purposes of 
computing the section 2056A estate tax, an election must be made on the 
Form 706-QDT that is filed with respect to the balance remaining in the 
QDOT upon the death of the surviving spouse. In addition, the separate 
requirements for making the section 2032 and/or section 2032A elections 
under those sections and the regulations thereunder must be complied 
with except that, for this purpose, the surviving spouse is treated as 
a resident of the United States regardless of the surviving spouse's 
actual residency status. Solely for purposes of this paragraph (b)(5), 
the citizenship of the first decedent is immaterial.
    (ii) Alternate valuation. For purposes of the alternate valuation 
election under section 2032, the election may not be made unless the 
election decreases both the value of the property remaining in the QDOT 
upon the death of the surviving spouse and the net amount of section 
2056A estate tax due. Once made, the election is irrevocable.
    (iii) Special use valuation. For purposes of section 2032A, the 
Designated Filer (in the case of multiple QDOTs) or the U.S. Trustee 
may elect to value certain farm and closely held business real property 
at its farm or business use value, rather than its fair market value, 
if all of the requirements under section 2032A and the applicable 
regulations are met, except that, for this purpose, the surviving 
spouse is treated as a resident of the United States regardless of the 
spouse's actual residency status. The total value of property valued 
under section 2032A in the QDOT cannot be decreased from fair market 
value by more than $750,000.

[[Page 43548]]

    (c) Miscellaneous rules. See sections 2056A(b)(2)(B)(i) and 
2056A(b)(2)(C) for special rules regarding the appropriate rate of tax. 
See section 2056A(b)(2)(B)(ii) for provisions regarding a credit or 
refund with respect to the section 2056A estate tax.
    (d) Examples. The rules of this section are illustrated by the 
following examples.
    Example 1. (i) D, a United States citizen, dies in 1995 a resident 
of State X, with a gross estate of $1,200,000. Under D's will, a 
pecuniary bequest of $700,000 passes to a QDOT for the benefit of D's 
spouse S, who is a resident but not a citizen of the United States. D's 
estate tax is computed as follows:

                                                                        
                                                                        
Gross estate..........................      $1,200,000   ...............
Marital Deduction.....................        (700,000)  ...............
                                       -----------------                
    Taxable Estate....................        $500,000   ...............
Gross Tax.............................  ...............        $155,800 
Less: Unified Credit..................  ...............        (155,800)
                                                        ----------------
    Net Tax...........................  ...............               0 

    (ii) S dies in 1997 at which time S is still a resident of the 
United States and the value of the assets of the QDOT is $700,000. 
Assuming there were no taxable events during S's lifetime with respect 
to the QDOT, the estate tax imposed under section 2056A(b)(1)(B) is 
$235,000, computed as follows:

                                                                        
                                                                        
D's actual taxable estate.................      $500,000  ..............
QDOT property.............................       700,000  ..............
                                           --------------               
    Total.................................    $1,200,000  ..............
Gross Tax.................................  ............       $427,800 
Less: Unified Credit......................  ............       (192,800)
                                                         ---------------
    Net Tax...............................  ............  Sec.  235,000 
Less: Tax that would have been imposed on                               
 D's actual taxable estate of $500,000....  ............              0 
                                                         ---------------
Section 2056A Estate Tax..................  ............       $235,000 

    Example 2. (i) The facts are the same as in Example 1, except that 
D's gross estate was $2,000,000 and D's estate paid $70,000 in state 
death taxes to State X. D's estate tax is computed as follows:

                                                                        
                                                                        
Gross Estate..................     $2,000,000   ........  ..............
Marital Deduction.............       (700,000)  ........  ..............
                               ----------------                         
    Taxable Estate............     $1,300,000   ........  ..............
Gross Tax.....................  ..............  ........       $469,800 
Less: Unified Credit..........  ..............   192,800  ..............
State Death Tax Credit                                                  
 Limitation (lesser of $51,600                                          
 or $70,000 tax paid).........  ..............    51,600       (244,400)
                               ---------------------------              
    Estate Tax................  ..............  ........       $225,400 

    (ii) S dies in 1997 at which time S is still a resident of the 
United States and the value of the assets of the QDOT is $800,000. S's 
estate pays $40,000 in State X death taxes with respect to the 
inclusion of the QDOT in S's gross estate for state death tax purposes. 
Assuming there were no taxable events during S's lifetime with respect 
to the QDOT, the estate tax imposed under section 2056A(b)(1)(B) is 
$304,800 computed as follows:

                                                                        
                                                                        
D's Actual Taxable Estate.................    $1,300,000  ..............
QDOT Property.............................       800,000  ..............
                                           --------------               
    Total.................................    $2,100,000  ..............
Gross Tax.................................  ............       $829,800 
Less: Unified Credit......................  ............       (192,800)
                                                         ---------------
    Pre-2011 section 2056A estate tax.....  ............       $637,000 
(A) State Death Tax Credit Computation:                                 
    (1) State death tax paid by S's estate                              
     with respect to the QDOT [$40,000]                                 
     plus state death tax previously paid                               
     by D's estate [$70,000] = $110,000...  ............  ..............
    (2) Credit limit under section 2011(b)                              
     (based on D's adjusted taxable estate                              
     of $2,040,000 under sections                                       
     2056A(b)(2)(A) and 2011(b)) =                                      
     $106,800.............................  ............  ..............

[[Page 43549]]
                                                                        
(B) State death tax credit allowable                                    
 against section 2056A estate tax (lesser                               
 of paragraph (ii)(A)(1) or (2) of this                                 
 Example 2                                  ............       (106,800)
                                                         ---------------
        Net Tax...........................  ............       $530,200 
Less: Tax that would have been imposed on                               
 D's taxable estate of $1,300,000.........  ............        225,400 
                                                         ---------------
    Section 2056A Estate Tax..............  ............       $304,800 


Sec. 20.2056A-7  Allowance of prior transfer credit under section 2013.

    (a) Property subject to QDOT election. Section 2056(d)(3) provides 
special rules for computing the section 2013 credit allowed with 
respect to property subject to a QDOT election. In computing the credit 
under section 2013, the amount of the credit is determined under 
section 2013 and the regulations thereunder, except that--
    (1) The first limitation as described in section 2013(b) and 
Sec. 20.2013-2 is the amount of the estate tax imposed under section 
2056A(b)(1)(A), with respect to distributions during the spouse's life, 
and under section 2056A(b)(1)(B), with respect to the value of the QDOT 
assets on the spouse's death;
    (2) In computing the second limitation as described in section 
2013(c) and Sec. 20.2013-3, the value of the property transferred to 
the decedent (as defined in section 2013(d) and Sec. 20.2013-4) is 
deemed to be the value of the QDOT assets on the date of death of the 
surviving spouse. The value as so determined is not reduced by the 
section 2056A estate tax imposed at the time of the spouse's death; and
    (3) The amount of the credit is determined without regard to the 
percentage limitations contained in section 2013(a).
    (b) Property not subject to QDOT election. If property includible 
in a decedent's gross estate passes to a noncitizen surviving spouse 
(the transferee) and no deduction is allowed to the decedent's estate 
for that interest in property under section 2056(a) solely because the 
requirements of section 2056(d)(2) are not satisfied, and the 
transferee spouse dies with an estate that is subject to tax under 
section 2001 or 2101, as the case may be, any credit for tax on prior 
transfers allowable to the estate of the transferee spouse under 
section 2013 with respect to such interest in property is determined in 
accordance with the rules of section 2013 and the regulations 
thereunder, except that the amount of the credit is determined without 
regard to the percentage limitations contained in section 2013(a).
    (c) Example. The application of this section may be illustrated by 
the following example:

    Example. The facts are the same as in Sec. 20.2056A-6, Example 
2(ii). D, a United States citizen, dies in 1994, a resident of State 
X, with a gross estate of $2,000,000. Under D's will, a pecuniary 
bequest of $700,000 passes to a QDOT for the benefit of D's spouse 
S, who is a resident but not a citizen of the United States. S dies 
in 1997 at which time S is still a resident of the United States and 
the value of the assets of the QDOT is $800,000. There were no 
taxable events during S's lifetime. An estate tax of $304,800 is 
imposed under section 2056A(b)(1)(B). S's taxable estate, including 
the value of the QDOT ($800,000), is $1,500,000.
    (i) Under paragraph (a)(1) of this section, the first limitation 
for purposes of section 2013(b) is $304,800, the amount of the 
section 2056A estate tax.
    (ii) Under paragraph (a)(2) of this section, the second 
limitation for purposes of section 2013(c) is computed as follows:
    (A) S's net estate tax payable under Sec. 20.2013-3(a)(1), as 
modified under paragraph (a)(2) of this section, is computed as 
follows:

                                                                        
                                                                        
Taxable estate................................  ...........   $1,500,000
Gross estate tax..............................  ...........      555,800
Less: Unified credit..........................     $192,800  ...........
Credit for state death taxes..................       64,400      257,200
                                               -------------------------
    Pre-2013 net estate tax payable...........  ...........     $298,600

    (B) S's net estate tax payable under Sec. 20.2013-3(a)(2), as 
modified under paragraph (a)(2) of this section, is computed as 
follows:

                                                                        
                                                                        
Taxable estate................................  ...........     $700,000
Gross estate tax..............................  ...........      229,800
Less: Unified credit..........................     $192,800  ...........
Credit for state death taxes..................       18,000      210,800
                                               -------------------------
    Net tax payable...........................  ...........      $19,000
(C) Second Limitation:                                                  
    Paragraph (ii)(A) of this Example.........     $298,600  ...........
    Less: Paragraph (ii)(B) of this Example...       19,000             
                                               --------------           
                                                                $279,600

    (iii) Credit for tax on prior transfers = $279,600 (lesser of 
paragraphs (i) or (ii) of this Example.


Sec. 20.2056A-8  Special rules for joint property.

    (a) Inclusion in gross estate--(1) General rule. If property is 
held by the decedent and the surviving spouse of the decedent as joint 
tenants with right of survivorship, or as tenants by the entirety, and 
the surviving spouse is not a United States citizen (or treated as a 
United States citizen) at the time of the decedent's death, the 
property is subject to inclusion in the decedent's gross estate in 
accordance with the rules of section 2040(a) (general rule for 
includibility of joint interests), and section 2040(b) (special rule 
for includibility of certain joint interests of husbands and wives) 
does not apply. Accordingly, the rules contained in section 2040(a) and 
Sec. 20.2040-1 govern the extent to which such joint interests are 
includible in the gross estate of a decedent who was a citizen or 
resident of the United States. Under Sec. 20.2040-1(a)(2), the entire 
value of jointly held property is included in the decedent's gross 
estate unless the executor submits facts sufficient to show that 
property was not entirely acquired with consideration furnished by the 
decedent, or was acquired by the decedent and the other joint owner by 
gift, bequest, devise or inheritance. If the decedent is a nonresident 
not a citizen of the United States, the rules of this paragraph (a)(1) 
apply pursuant to sections 2103, 2031, 2040(a), and 2056(d)(1)(B).
    (2) Consideration furnished by surviving spouse. For purposes of 
applying section 2040(a), in determining the amount of consideration 
furnished by the surviving spouse, any consideration furnished by the 
decedent with respect to the property before July 14, 1988, is treated 
as consideration furnished by the surviving spouse to the 

[[Page 43550]]
extent that the consideration was treated as a gift to the spouse under 
section 2511, or to the extent that the decedent elected to treat the 
transfer as a gift to the spouse under section 2515 (to the extent 
applicable). For purposes of determining whether the consideration was 
a gift by the decedent under section 2511, it is presumed that the 
decedent was a citizen of the United States at the time the 
consideration was so furnished to the spouse. The special rule of this 
paragraph (a)(2) is applicable only if the donor spouse predeceases the 
donee spouse and not if the donee spouse predeceases the donor spouse. 
In cases where the donee spouse predeceases the donor spouse, any 
portion of the consideration treated as a gift to the donee spouse/
decedent on the creation of the tenancy (or subsequently thereafter), 
regardless of the date the tenancy was created, is not treated as 
consideration furnished by the donee spouse/decedent for purposes of 
section 2040(a).
    (3) Amount allowed to be transferred to QDOT. If, as a result of 
the application of the rules described above, only a portion of the 
value of a jointly-held property interest is includible in a decedent's 
gross estate, only that portion that is so includible may be 
transferred to a QDOT under section 2056(d)(2). See Sec. 20.2056A-
4(b)(1) and (d), Example 3.
    (b) Surviving spouse becomes citizen. Paragraph (a) of this section 
does not apply if the surviving spouse meets the requirements of 
section 2056(d)(4). For the definition of resident in applying section 
2056(d)(4), see Sec. 20.0-1(b).
    (c) Examples. The provisions of this section are illustrated by the 
following examples:

     Example 1. In 1987, D, a United States citizen, purchases real 
property and takes title in the names of D and S, D's spouse (a 
noncitizen, but a United States resident), as joint tenants with 
right of survivorship. In accordance with Sec. 25.2511-1(h)(5) of 
this chapter, one-half of the value of the property is a gift to S. 
D dies in 1995. Because S is not a United States citizen, the 
provisions of section 2040(a) are determinative of the extent to 
which the real property is includible in D's gross estate. Because 
the joint tenancy was established before July 14, 1988, and under 
the applicable provisions of the Internal Revenue Code and 
regulations the transfer was treated as a gift of one-half of the 
property, one-half of the value of the property is deemed 
attributable to consideration furnished by S for purposes of section 
2040(a). Accordingly, only one-half of the value of the property is 
includible in D's gross estate under section 2040(a).
    Example 2. The facts are the same as in Example 1, except that S 
dies in 1995 survived by D who is not a citizen of the United 
States. For purposes of applying section 2040(a), D's gift to S on 
the creation of the tenancy is not treated as consideration 
furnished by S toward the acquisition of the property. Accordingly, 
since S made no other contributions with respect to the property, no 
portion of the property is includible in S's gross estate.
    Example 3. The facts are the same as in Example 1, except that D 
and S purchase real property in 1990 making the down payment with 
funds from a joint bank account. All subsequent mortgage payments 
and improvements are paid from the joint bank account. The only 
funds deposited in the joint bank account are the earnings of D and 
S. It is established that D earned approximately 60% of the funds 
and S earned approximately 40% of the funds. D dies in 1995. The 
establishment of S's contribution to the joint bank account is 
sufficient to show that S contributed 40% of the consideration for 
the property. Thus, under paragraph Sec. 20.2040-1(a)(2), 60% of the 
value of the property is includible in D's gross estate.


Sec. 20.2056A-9  Designated Filer.

    Section 2056A(b)(2)(C) provides special rules where more than one 
QDOT is established with respect to a decedent. The designation of a 
person responsible for filing a return under section 2056A(b)(2)(C)(i) 
(the Designated Filer) must be made on the decedent's federal estate 
tax return, or on the first Form 706-QDT that is due and is filed by 
its prescribed date, including extensions. The Designated Filer must be 
a U.S. Trustee. If the U.S. Trustee is an individual, that individual 
must have a tax home (as defined in section 911(d)(3)) in the United 
States. At least sixty days before the due date for filing the tax 
returns for all of the QDOTs, the U.S. Trustee(s) of each of the QDOTs 
must provide to the Designated Filer all of the necessary information 
relating to distributions from their respective QDOTs. The section 
2056A estate tax due from each QDOT is allocated on a pro rata basis 
(based on the ratio of the amount of each respective distribution 
constituting a taxable event to the amount of all such distributions), 
unless a different allocation is required under the terms of the 
governing instrument or under local law. Unless the decedent has 
provided for a successor Designated Filer, if the Designated Filer 
ceases to qualify as a U.S. Trustee, or otherwise becomes unable to 
serve as the Designated Filer, the remaining trustees of each QDOT must 
select a qualifying successor Designated Filer (who is also a U.S. 
Trustee) prior to the due date for the filing of Form 706-QDT 
(including extensions). The selection is to be indicated on the Form 
706-QDT. Failure to select a successor Designated Filer will result in 
the application of section 2056A(b)(2)(C).


Sec. 20.2056A-10  Surviving spouse becomes citizen after QDOT 
established.

    (a) Section 2056A estate tax no longer imposed under certain 
circumstances. Section 2056A(b)(12) provides that a QDOT is no longer 
subject to the imposition of the section 2056A estate tax if the 
surviving spouse becomes a citizen of the United States and the 
following conditions are satisfied--
    (1) The spouse either was a United States resident (for the 
definition of resident for this purpose, see Sec. 20.2056A-1(b)) at all 
times after the death of the decedent and before becoming a United 
States citizen, or no taxable distributions are made from the QDOT 
before the spouse becomes a United States citizen (regardless of the 
residency status of the spouse); and
    (2) The U.S. Trustee(s) of the QDOT notifies the Internal Revenue 
Service and certifies in writing that the surviving spouse has become a 
United States citizen. Notice is to be made by filing a final Form 706-
QDT on or before April 15th of the calendar year following the year in 
which the surviving spouse becomes a United States citizen, unless an 
extension of time for filing is granted under section 6081.
    (b) Special election by spouse. If the surviving spouse becomes a 
United States citizen and the spouse is not a United States resident at 
all times after the death of the decedent and before becoming a United 
States citizen, and a tax was previously imposed under section 
2056A(b)(1)(A) with respect to any distribution from the QDOT before 
the surviving spouse becomes a United States citizen, the estate tax 
imposed under section 2056A(b)(1) does not apply to distributions after 
the spouse becomes a citizen if--
    (1) The spouse elects to treat any taxable distribution from the 
QDOT prior to the spouse's election as a taxable gift made by the 
spouse for purposes of section 2001(b)(1)(B) (referring to adjusted 
taxable gifts), and for purposes of determining the amount of the tax 
imposed by section 2501 on actual taxable gifts made by the spouse 
during the year in which the spouse becomes a citizen or in any 
subsequent year;
    (2) The spouse elects to treat any previous reduction in the 
section 2056A estate tax by reason of the decedent's unified credit 
(under either section 2010 or section 2102(c)) as a reduction in the 
spouse's unified credit under section 2505 for purposes of determining 
the amount of the credit allowable with 

[[Page 43551]]
respect to taxable gifts made by the surviving spouse during the 
taxable year in which the spouse becomes a citizen, or in any 
subsequent year; and
    (3) The elections referred to in this paragraph (b) are made by 
timely filing a Form 706-QDT on or before April 15th of the year 
following the year in which the surviving spouse becomes a citizen 
(unless an extension of time for filing is granted under section 6081) 
and attaching notification of the election to the return.


Sec. 20.2056A-11  Filing requirements and payment of the section 2056A 
estate tax.

    (a) Distributions during surviving spouse's life. Section 
2056A(b)(5)(A) provides the due date for payment of the section 2056A 
estate tax imposed on distributions during the spouse's lifetime. An 
extension of not more than 6 months may be obtained for the filing of 
Form 706-QDT under section 6081(a) if the conditions specified therein 
are satisfied. See also Sec. 20.2056A- 5(c)(1) regarding the 
requirements for filing a Form 706-QDT in the case of a distribution to 
the surviving spouse on account of hardship, and Sec. 20.2056A-2T(d)(3) 
regarding the requirements for filing Form 706-QDT in the case of the 
required annual statement.
    (b) Tax at death of surviving spouse. Section 2056A(b)(5)(B) 
provides the due date for payment of the section 2056A estate tax 
imposed on the death of the spouse under section 2056A(b)(1)(B). An 
extension of not more than 6 months may be obtained for the filing of 
the Form 706-QDT under section 6081(a), if the conditions specified 
therein are satisfied. The obtaining of an extension of time to file 
under section 6081(a) does not extend the time to pay the section 2056A 
estate tax as prescribed under section 2056A(b)(5)(B).
    (c) Extension of time for paying section 2056A estate tax--(1) 
Extension of time for paying tax under section 6161(a)(2). Pursuant to 
sections 2056A(b)(10)(C) and 6161(a)(2), upon a showing of reasonable 
cause, an extension of time for a reasonable period beyond the due date 
may be granted to pay any part of the estate tax that is imposed upon 
the surviving spouse's death under section 2056A(b)(1)(B) and shown on 
the final Form 706-QDT, or any part of any installments of such tax 
payable under section 6166 (including any part of a deficiency prorated 
to any installment under such section). The extension may not exceed 10 
years from the date prescribed for payment of the tax (or in the case 
of an installment or part of a deficiency prorated to an installment, 
if later, not beyond the date that is 12 months after the due date for 
the last installment). Such extension may be granted by the district 
director or the director of the service center where the Form 706-QDT 
is filed.
    (2) Extension of time for paying tax under section 6161(a)(1). An 
extension of time beyond the due date to pay any part of the estate tax 
imposed on lifetime distributions under section 2056A(b)(1)(A), or 
imposed at the death of the surviving spouse under section 
2056A(b)(1)(B), may be granted for a reasonable period of time, not to 
exceed 6 months (12 months in the case of the estate tax imposed under 
section 2056A(b)(1)(B) at the surviving spouse's death), by the 
district director or the director of the service center where the Form 
706-QDT is filed.
    (d) Liability for tax. Under section 2056A(b)(6), each trustee (and 
not solely the U.S. Trustee(s)) of a QDOT is personally liable for the 
amount of the estate tax imposed in the case of any taxable event under 
section 2056A(b)(1). In the case of multiple QDOTs with respect to the 
same decedent, each trustee of a QDOT is personally liable for the 
amount of the section 2056A estate tax imposed on any taxable event 
with respect to that trustee's QDOT, but is not personally liable for 
tax imposed with respect to taxable events involving QDOTs of which 
that person is not a trustee. However, the assets of any QDOT are 
subject to collection by the Internal Revenue Service for any tax 
resulting from a taxable event with respect to any other QDOT 
established with respect to the same decedent. The trustee may also be 
personally liable as a withholding agent under section 1461 or other 
applicable provisions of the Internal Revenue Code.


Sec. 20.2056A-12  Increased basis for section 2056A estate tax paid 
with respect to distribution from a QDOT.

    Under section 2056A(b)(13), in the case of any distribution from a 
QDOT on which an estate tax is imposed under section 2056A(b)(1)(A), 
the distribution is treated as a transfer by gift for purposes of 
section 1015, and any estate tax paid under section 2056A(b)(1)(A) is 
treated as a gift tax. See Sec. 1.1015-5(c)(4) and (5) of this chapter 
for rules for determining the amount by which the basis of the 
distributed property is increased.


Sec. 20.2056A-13  Effective date.

    The provisions of Secs. 20.2056A-1 through 20.2056A-12 are 
effective with respect to estates of decedents dying after August 22, 
1995.
    Par. 7. Sec. 20.2101-1 is revised to read as follows:


Sec. 20.2101-1  Estates of nonresidents not citizens; tax imposed.

    (a) Imposition of tax. Section 2101 imposes a tax on the transfer 
of the taxable estate of a nonresident who is not a citizen of the 
United States at the time of death. In the case of estates of decedents 
dying after November 10, 1988, the tax is computed at the same rates as 
the tax that is imposed on the transfer of the taxable estate of a 
citizen or resident of the United States in accordance with the 
provisions of sections 2101(b) and (c). For the meaning of the terms 
resident, nonresident, and United States, as applied to a decedent for 
purposes of the estate tax, see Sec. 20.0-1(b)(1) and (2). For the 
liability of the executor for the payment of the tax, see section 2002. 
For special rules as to the phaseout of the graduated rates and unified 
credit, see sections 2001(c)(2) and 2101(b).
    (b) Special rates in the case of certain decedents. In the case of 
an estate of a nonresident who was not a citizen of the United States 
and who died after December 31, 1976, and on or before November 10, 
1988, the tax on the nonresident's taxable estate is computed using the 
formula provided under section 2101(b), except that the rate schedule 
in paragraph (c) of this section is to be used in lieu of the rate 
schedule in section 2001(c).
    (c) Rate schedule for decedents dying after December 31, 1976 and 
on or before November 10, 1988.

If the amount for which the          The tentative tax is:              
 tentative tax to be computed is:                                       
    Not over $100,000..............  6% of such amount.                 
    Over $100,000 but not over       $6,000, plus 12% of excess over    
     $500,000.                        $100,000.                         
    Over $500,000 but not over       $54,000, plus 18% of excess over   
     $1,000,000.                      $500,000.                         
    Over $1,000,000 but not over     $144,000, plus 24% of excess over  
     $2,000,000.                      $1,000,000.                       
    Over $2,000,000................  $384,000, plus 30% of excess over  
                                      $2,000,000.                       
                                                                        


[[Page 43552]]


    Par. 8. Section 20.2102-1 is amended by adding paragraph (c) to 
read as follows:


Sec. 20.2102-1  Estates of nonresidents not citizens; credits against 
tax.

* * * * *
    (c) Unified credit--
    (1) In general. Subject to paragraph (c)(2) of this section, in the 
case of estates of decedents dying after November 10, 1988, a unified 
credit of $13,000 is allowed against the tax imposed by section 2101 
subject to the limitations of section 2102(c).
    (2) When treaty is applicable. To the extent required under any 
treaty obligation of the United States, the estate of a nonresident not 
a citizen of the United States is allowed the unified credit permitted 
to a United States citizen or resident of $192,800, multiplied by the 
proportion that the total gross estate of the decedent situated in the 
United States bears to the decedent's total gross estate wherever 
situated.
    (3) Certain residents of possessions. In the case of a decedent who 
is considered to be a nonresident not a citizen of the United States 
under section 2209, there is allowed a unified credit equal to the 
greater of $13,000, or $46,800 multiplied by the proportion that the 
decedent's gross estate situated in the United States bears to the 
total gross estate of the decedent wherever situated.
    Par. 9. Section 20.2106-1 is amended as follows:
    1. Paragraph (a)(3) is revised.
    2. The last sentence of paragraph (b) is removed.
    3. Paragraph (c) is removed.
    The revision reads as follows:


Sec. 20.2106-1  Estates of nonresidents not citizens; taxable estate; 
deductions in general.

    (a) * * *
    (3) Subject to the special rules set forth at Sec. 20.2056A-1(c), 
the amount which would be deductible with respect to property situated 
in the United States at the time of the decedent's death under the 
principles of section 2056. Thus, if the surviving spouse of the 
decedent is a citizen of the United States at the time of the 
decedent's death, a marital deduction is allowed with respect to the 
estate of the decedent if all other applicable requirements of section 
2056 are satisfied. If the surviving spouse of the decedent is not a 
citizen of the United States at the time of the decedent's death, the 
provisions of section 2056, including specifically the provisions of 
section 2056(d) and (unless section 2056(d)(4) applies) the provisions 
of section 2056A (QDOTs) must be satisfied.
* * * * *


Sec. 20.2106-2  [Amended]

    Par. 10. In Sec. 20.2106-2, paragraph (c) is removed and reserved.

PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31,1954

    Par. 11. The authority citation for part 25 is revised to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 12. Section 25.2503-2 is amended as follows:
    1. The first sentence in paragraph (a) is revised.
    2. Paragraph (f) is added.
    3. The revision and addition read as follows:


Sec. 25.2503-2  Exclusion from gifts.

    (a) * * * Except as provided in paragraph (f) of this section 
(involving gifts to a noncitizen spouse), the first $10,000 of gifts 
made to any one donee during the calendar year 1982 or any calendar 
year thereafter, except gifts of future interests in property as 
defined in Secs. 25.2503-3 and 25.2503-4, is excluded in determining 
the total amount  of  gifts  for  the  calendar year. * * *
* * * * *
    (f) Special rule in the case of gifts made on or after July 14, 
1988, to a spouse who is not a United States citizen--(1) In general. 
Subject to the special rules set forth at Sec. 20.2056A-1(c) of this 
chapter, in the case of gifts made on or after July 14, 1988, if the 
donee of the gift is the donor's spouse and the donee spouse is not a 
citizen of the United States at the time of the gift, the first 
$100,000 of gifts made during the calendar year to the donee spouse 
(except gifts of future interests) is excluded in determining the total 
amount of gifts for the calendar year. The rule of this paragraph (f) 
applies regardless of whether the donor is a citizen or resident of the 
United States for purposes of chapter 12 of the Internal Revenue Code.
    (2) Gifts made after June 29, 1989. In the case of gifts made after 
June 29, 1989, the $100,000 exclusion provided in paragraph (f)(1) of 
this section applies only if the gift in excess of the otherwise 
applicable annual exclusion is in a form that qualifies for the gift 
tax marital deduction under section 2523(a) but for the provisions of 
section 2523(i)(1) (disallowing the marital deduction if the donee 
spouse is not a United States citizen.) See Sec. 25.2523(i)-1(d), 
Example 4.
    (3) Effective date. This paragraph (f) is effective with respect to 
gifts made after August 22, 1995.
    Par. 13. Secs. 25.2523(i)-1, 25.2523(i)-2 and 25.2523(i)-3 are 
added to read as follows:


Sec. 25.2523(i)-1  Disallowance of marital deduction when spouse is not 
a United States citizen.

    (a) In general. Subject to Sec. 20.2056A-1(c) of this chapter, 
section 2523(i)(1) disallows the marital deduction if the spouse of the 
donor is not a citizen of the United States at the time of the gift. If 
the spouse of the donor is a citizen of the United States at the time 
of the gift, the gift tax marital deduction under section 2523(a) is 
allowed regardless of whether the donor is a citizen or resident of the 
United States at the time of the gift, subject to the otherwise 
applicable rules of section 2523.
    (b) Exception for certain joint and survivor annuities. Paragraph 
(a) does not apply to disallow the marital deduction with respect to 
any transfer resulting in the acquisition of rights by a noncitizen 
spouse under a joint and survivor annuity described in section 
2523(f)(6).
    (c) Increased annual exclusion--(1) In general. In the case of 
gifts made from a donor to the donor's spouse for which a marital 
deduction is not allowable under this section, if the gift otherwise 
qualifies for the gift tax annual exclusion under section 2503(b), the 
amount of the annual exclusion under section 2503(b) is $100,000 in 
lieu of $10,000. However, in the case of gifts made after June 29, 
1989, in order for the increased annual exclusion to apply, the gift in 
excess of the otherwise applicable annual exclusion under section 
2503(b) must be in a form that qualifies for the marital deduction but 
for the disallowance provision of section 2523(i)(1). See paragraph 
(d), Example 4, of this section.
    (2) Status of donor. The $100,000 annual exclusion for gifts to a 
noncitizen spouse is available regardless of the status of the donor. 
Accordingly, it is immaterial whether the donor is a citizen, resident 
or a nonresident not a citizen of the United States, as long as the 
spouse of the donor is not a citizen of the United States at the time 
of the gift and the conditions for allowance of the increased annual 
exclusion have been satisfied. See Sec. 25.2503-2(f).
    (d) Examples. The principles outlined in this section are 
illustrated in the following examples. Assume in each of the examples 
that the donee, S, is D's spouse and is not a United States citizen at 
the time of the gift.


[[Page 43553]]

    Example 1. Outright transfer of present interest. In 1995, D, a 
United States citizen, transfers to S, outright, 100 shares of X 
corporation stock valued for federal gift tax purposes at $130,000. 
The transfer is a gift of a present interest in property under 
section 2503(b). Additionally, the gift qualifies for the gift tax 
marital deduction except for the disallowance provision of section 
2523(i)(1). Accordingly, $100,000 of the $130,000 gift is excluded 
from the total amount of gifts made during the calendar year by D 
for gift tax purposes.
    Example 2. Transfer of survivor benefits. In 1995, D, a United 
States citizen, retires from employment in the United States and 
elects to receive a reduced retirement annuity in order to provide S 
with a survivor annuity upon D's death. The transfer of rights to S 
in the joint and survivor annuity is a gift by D for gift tax 
purposes. However, under paragraph (b) of this section, the gift 
qualifies for the gift tax marital deduction even though S is not a 
United States citizen.
    Example 3. Transfer of present interest in trust property. In 
1995, D, a resident alien, transfers property valued at $500,000 in 
trust to S, who is also a resident alien. The trust instrument 
provides that the trust income is payable to S at least quarterly 
and S has a testamentary general power to appoint the trust corpus. 
The transfer to S qualifies for the marital deduction under section 
2523 but for the provisions of section 2523(i)(1). Because S has a 
life income interest in the trust, S has a present interest in a 
portion of the trust. Accordingly, D may exclude the present value 
of S's income interest (up to $100,000) from D's total 1995 calendar 
year gifts.
    Example 4. Transfer of present interest in trust property. The 
facts are the same as in Example 3, except that S does not have a 
testamentary general power to appoint the trust corpus. Instead, D's 
child, C, has a remainder interest in the trust. If S were a United 
States citizen, the transfer would qualify for the gift tax marital 
deduction if a qualified terminable interest property election was 
made under section 2523(f)(4). However, because S is not a U.S. 
citizen, D may not make a qualified terminable interest property 
election. Accordingly, the gift does not qualify for the gift tax 
marital deduction but for the disallowance provision of section 
2523(i)(1). The $100,000 annual exclusion under section 2523(i)(2) 
is not available with respect to D's transfer in trust and D may not 
exclude the present value of S's income interest in excess of 
$10,000 from D's total 1995 calendar year gifts.
    Example 5. Spouse becomes citizen after transfer. D, a United 
States citizen, transfers a residence valued at $350,000 on December 
20, 1995, to D's spouse, S, a resident alien. On January 31, 1996, S 
becomes a naturalized United States citizen. On D's federal gift tax 
return for 1995, D must include $250,000 as a gift ($350,000 
transfer less $100,000 exclusion). Although S becomes a citizen in 
January, 1996, S is not a citizen of the United States at the time 
the transfer is made. Therefore, no gift tax marital deduction is 
allowable. However, the transfer does qualify for the $100,000 
annual exclusion.


Sec. 25.2523(i)-2  Treatment of spousal joint tenancy property where 
one spouse is not a United States citizen.

    (a) In general. In the case of a joint tenancy with right of 
survivorship between spouses, or a tenancy by the entirety, where the 
donee spouse is not a United States citizen, the gift tax treatment of 
the creation and termination of the tenancy (regardless of whether the 
donor is a citizen, resident or nonresident not a citizen of the United 
States at such time), is governed by the principles of sections 2515 
and 2515A (as such sections were in effect before their repeal by the 
Economic Recovery Tax Act of 1981). However, in applying these 
principles, the donor spouse may not elect to treat the creation of a 
tenancy in real property as a gift, as provided in section 2515(c) 
(prior to its repeal by the Economic Recovery Tax Act of 1981, Pub. L. 
97-34, 95 Stat. 172).
    (b) Tenancies by the entirety and joint tenancies in real 
property--(1) Creation of the tenancy on or after July 14, 1988. Under 
the principles of section 2515 (without regard to section 2515(c)), the 
creation of a tenancy by the entirety (or joint tenancy) in real 
property (either by one spouse alone or by both spouses), and any 
additions to the value of the tenancy in the form of improvements, 
reductions in indebtedness thereon, or otherwise, is not deemed to be a 
transfer of property for purposes of the gift tax, regardless of the 
proportion of the consideration furnished by each spouse, but only if 
the creation of the tenancy would otherwise be a gift to the donee 
spouse who is not a citizen of the United States at the time of the 
gift.
    (2) Termination--(i) Tenancies created after December 31, 1954 and 
before January 1,1982 not subject to an election under section 2515(c), 
and tenancies created on or after July 14, 1988. When a tenancy to 
which this paragraph (b) applies is terminated on or after July 14, 
1988, other than by reason of the death of a spouse, then, under the 
principles of section 2515, a spouse is deemed to have made a gift to 
the extent that the proportion of the total consideration furnished by 
the spouse, multiplied by the proceeds of the termination (whether in 
the form of cash, property, or interests in property), exceeds the 
value of the proceeds of termination received by the spouse. See 
section 2523(i), and Sec. 25.2523(i)-1 and Sec. 25.2503-2(f) as to 
certain of the tax consequences that may result upon termination of the 
tenancy. This paragraph (b)(2)(i) applies to tenancies created after 
December 31, 1954, and before January 1, 1982, not subject to an 
election under section 2515(c), and to tenancies created on or after 
July 14, 1988.
    (ii) Tenancies created after December 31, 1954 and before January 
1, 1982 subject to an election under section 2515(c) and tenancies 
created after December 31, 1981 and before July 14, 1988. When a 
tenancy to which this paragraph (b) applies is terminated on or after 
July 14, 1988, other than by reason of the death of a spouse, then, 
under the principles of section 2515, a spouse is deemed to have made a 
gift to the extent that the proportion of the total consideration 
furnished by the spouse, multiplied by the proceeds of the termination 
(whether in the form of cash, property, or interests in property), 
exceeds the value of the proceeds of termination received by the 
spouse. See section 2523(i), and Secs. 25.2523(i)-1 and 25.2503-2(f) as 
to certain of the tax consequences that may result upon termination of 
the tenancy. In the case of tenancies to which this paragraph applies, 
if the creation of the tenancy was treated as a gift to the noncitizen 
donee spouse under section 2515(c) (in the case of tenancies created 
prior to 1982) or section 2511 (in the case of tenancies created after 
December 31, 1981 and before July 14, 1988), then, upon termination of 
the tenancy, for purposes of applying the principles of section 2515 
and the regulations thereunder, the amount treated as a gift on 
creation of the tenancy is treated as consideration originally 
belonging to the noncitizen spouse and never acquired by the noncitizen 
spouse from the donor spouse. This paragraph (b)(2)(ii) applies to 
tenancies created after December 31, 1954, and before January 1, 1982, 
subject to an election under section 2515(c), and to tenancies created 
after December 31, 1981, and before July 14, 1988.
    (3) Miscellaneous provisions--(i) Tenancy by the entirety. For 
purposes of this section, tenancy by the entirety includes a joint 
tenancy between husband and wife with right of survivorship.
    (ii) No election to treat as gift. The regulations under section 
2515 that relate to the election to treat the creation of a tenancy by 
the entirety as constituting a gift and the consequences of such an 
election upon termination of the tenancy (Secs. 25.2515-2 and 25.2515-
4) do not apply for purposes of section 2523(i)(3).
    (4) Examples. The application of this section may be illustrated by 
the following examples:

    Example 1. In 1992, A, a United States citizen, furnished 
$200,000 and A's spouse B, a resident alien, furnished $50,000 for 
the purchase and subsequent improvement of 

[[Page 43554]]
real property held by them as tenants by the entirety. The property is 
sold in 1998 for $300,000. A receives $225,000 and B receives 
$75,000 of the sales proceeds. The termination results in a gift of 
$15,000 by A to B, computed as follows:
[GRAPHIC][TIFF OMITTED]TR22AU95.009

$240,000-$225,000 (proceeds received by A)=$15,000 gift by A to B.

    Example 2. In 1986, A purchased real property for $300,000 and 
took title in the names of A and B, A's spouse, as joint tenants. 
Under section 2511 and Sec. 25.2511-1(h)(1) of the regulations, A 
was treated as making a gift of one-half of the value of the 
property ($150,000) to B. In 1995, the real property is sold for 
$400,000 and B receives the entire proceeds of sale. For purposes of 
determining the amount of the gift on termination of the tenancy 
under the principles of section 2515 and the regulations thereunder, 
the amount treated as a gift to B on creation of the tenancy under 
section 2511 is treated as B's contribution towards the purchase of 
the property. Accordingly, the termination of the tenancy results in 
a gift of $200,000 from A to B determined as follows:
[GRAPHIC][TIFF OMITTED]TR22AU95.010

$200,000-0 (proceeds received by A)=$200,000 gift by A to B.

    (c) Tenancies by the entirety in personal property where one spouse 
is not a United States citizen--(1) In general. In the case of the 
creation (either by one spouse alone or by both spouses where at least 
one of the spouses is not a United States citizen) of a joint interest 
in personal property with right of survivorship, or additions to the 
value thereof in the form of improvements, reductions in the 
indebtedness thereof, or otherwise, the retained interest of each 
spouse, solely for purposes of determining whether there has been a 
gift by the donor to the spouse who is not a citizen of the United 
States at the time of the gift, is treated as one-half of the value of 
the joint interest. See section 2523(i) and Secs. 25.2523(i)-1 and 
25.2503-2(f) as to certain of the tax consequences that may result upon 
creation and termination of the tenancy.
    (2) Exception. The rule provided in paragraph (c)(1) of this 
section does not apply with respect to any joint interest in property 
if the fair market value of the interest in property (determined as if 
each spouse had a right to sever) cannot reasonably be ascertained 
except by reference to the life expectancy of one or both spouses. In 
these cases, actuarial principles may need to be resorted to in 
determining the gift tax consequences of the transaction.


Sec. 25.2523(i)-3  Effective date.

    The provisions of Secs. 25.2523(i)-1 and 25.2523(i)-2 are effective 
in the case of gifts made after August 22, 1995.
    Par. 14. In Sec. 25.2702-1, paragraph (c)(8) is added to read as 
follows:


Sec. 25.2702-1  Special valuation rules in the case of transfers of 
interests in trust.

* * * * *
    (c) * * *
    (8) Transfer or assignment to a Qualified Domestic Trust. A 
transfer or assignment (as described in section 2056(d)(2)(B)) by a 
noncitizen surviving spouse of property to a Qualified Domestic Trust 
under the circumstances described in Sec. 20.2056A-4(b) of this 
chapter, where the surviving spouse retains an interest in the 
transferred property that is not a qualified interest and the transfer 
is not described in sections 2702(a)(3)(A)(ii) or 2702(c)(4).

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 15. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 16. Section 602.101(c) is amended by adding entries in 
numerical order in the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                            Current OMB 
   CFR part or section where identified and described       control No. 
------------------------------------------------------------------------
                                                                        
                 *        *        *        *          *                
20.2056A-3..............................................       1545-1360
20.2056A-4..............................................       1545-1360
20.2056A-10.............................................       1545-1360
                                                                        
                 *        *        *        *          *                
------------------------------------------------------------------------

Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: December 21, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-19867 Filed 8-21-95; 8:45 am]
BILLING CODE 4830-01-U