[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