Estate and Gift Tax Marital Deduction

Federal RegisterMar 1, 1994

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 20, 22, 25, and 602

[TD 8522]

RIN 1545-AC67

Estate and Gift Tax Marital Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations relating to the

estate tax and gift tax marital deduction. Changes to the applicable

tax law were made by the Tax Reform Act of 1976, the Revenue Act of

1978, the Economic Recovery Tax Act of 1981, the Technical Corrections

Act of 1982, the Deficit Reduction Act of 1984, the Tax Reform Act of

1986, the Technical and Miscellaneous Revenue Act of 1988, the Omnibus

Budget Reconciliation Act of 1989, and the Energy Policy Act of 1992.

These regulations will provide the public with the guidance needed to

comply with those Acts.

EFFECTIVE DATE: March 1, 1994.

FOR FURTHER INFORMATION CONTACT: Susan Hurwitz, (202) 622-3090 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information requirement contained in this final

regulation has been reviewed and approved by the Office of Management

and Budget in accordance with the requirements of the Paperwork

Reduction Act (44 U.S.C. 3504(h)) under control number 1545-0015. The

estimated annual burden per respondent varies from .1 to .5 hours

depending on individual circumstances, with an estimated average of .25

hours.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be directed to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and to the Office of Management and Budget,

Attention: Desk Officer for the Department of Treasury, Office of

Information and Regulatory Affairs, Washington, DC 20503.

Background

On May 21, 1984, the IRS published in the Federal Register proposed

amendments to the Estate and Gift Tax Regulations (26 CFR part 20 and

part 25) under sections 2044, 2056, 2207A, 2519, 2523, and 6019 of the

Internal Revenue Code (Code) (49 FR 21350). Conforming changes were

proposed for regulations under other sections of the Code. The

amendments implement and provide guidance with respect to sections

2044, 2056, 2207A, 2519, 2523, and 6019 which were added or amended by

the Tax Reform Act of 1976, the Revenue Act of 1978, the Economic

Recovery Tax Act of 1981, and the Technical Corrections Act of 1982.

This project finalizes those amendments. Additionally, revisions have

been made in the final regulations to reflect certain statutory changes

made since the publication of the proposed regulations by the Deficit

Reduction Act of 1984, the Tax Reform Act of 1986, the Technical and

Miscellaneous Revenue Act of 1988, the Omnibus Budget Reconciliation

Act of 1989, and the Energy Policy Act of 1992. Written comments

responding to the Notice of Proposed Rulemaking were received. No

public hearing was requested and none was held. After consideration of

all of the comments regarding the proposed amendments, those amendments

are adopted by this Treasury decision with revisions in response to

those comments. The significant comments and revisions are described

below.

Explanation of Provisions

In response to comments, Sec. 20.2044-1(b), as proposed, has been

revised to include a reference to section 6166. Therefore, property

included in the surviving spouse's gross estate under section 2044 is

treated as passing from such spouse's estate upon such spouse's later

death for purposes of determining whether the estate is eligible to pay

the estate tax liability in installments under section 6166.

In response to comments, Sec. 20.2044-1(c), as proposed, has been

revised to include guidance for taxpayers on the evidence that is

required in order to rebut the presumption that property in which the

surviving spouse had a qualifying income interest for life was deducted

by the first decedent's estate under section 2056(b)(7) or by the donor

spouse under section 2523(f) in determining the prior decedent's estate

or gift tax liability.

Several changes were made in the final regulations regarding the

definition of the term ``specific portion'' as used in sections

2056(b)(5), 2056(b)(7), 2523(e) and 2523(f). In general, a spousal

interest qualifies for the marital deduction under section 2056(b)(5)

or section 2523(e) if the spouse receives an income interest with

respect to the entire interest in property or a ``specific portion'' of

the entire interest, coupled with a general power of appointment over

the entire corpus or a ``specific portion'' of the entire corpus.

Similarly, an interest is eligible for the qualified terminable

interest property (QTIP) election under section 2056(b)(7) or section

2523(f) if the spouse receives an income interest in the entire

interest or a ``specific portion'' of the interest. Under

Secs. 20.2056(b)-5(c) and 25.2523(e)-1(c), in order to constitute a

right to income in, or power over, a specific portion of property, the

right or power must relate to a fraction or percentage share of the

property.

However, in Northeastern Pennsylvania National Bank and Trust Co.

v. United States, 387 U.S. 213 (1967), the United States Supreme Court

held that, for purposes of section 2056(b)(5), a right to receive a

specified periodic payment (e.g., $24,000 per year) from a trust also

constitutes a right to receive the income from a specific portion of

the trust corpus; i.e., the pecuniary amount of corpus that, based on

the assumed rate of return used in the regulations, would generate the

periodic payment. In reaching this conclusion, the Court invalidated

Sec. 20.2056(b)-5(c) to the extent it precluded characterization of a

specific periodic payment as a right to income from a specific portion

of trust corpus.

In Estate of Alexander v. Commissioner, 82 T.C. 34 (1984), aff'd

without opinion (4th Cir. 1985), the Tax Court held that a power of

appointment over a pecuniary amount of trust corpus constituted a power

of appointment over a ``specific portion'' of the trust property thus

qualifying the property for the marital deduction under section

2056(b)(5). The Tax Court felt compelled to reach this decision in view

of the Supreme Court's decision in Northeastern Pennsylvania National

Bank, which applied the term in the context of the requisite spousal

income interest.

The proposed regulations provided amendments to the definition of

the term ``specific portion'' under Secs. 20.2056(b)-5(c) and

25.2523(e)-1 with respect to the requisite spousal income interest that

conform to the Court's decision in Northeastern Pennsylvania National

Bank. In addition, Secs. 20.2056(b)-7(c) and 25.2523(f)-1(c), and

illustrative examples, adopted the Northeastern Pennsylvania National

Bank rule with respect to interests within the purview of section

2056(b)(7) or section 2523(f).

However, section 1941 of the Energy Policy Act of 1992, Public Law

102-486, amended section 2056(b) and section 2523 (e) and (f) to limit

the term ``specific portion'' such that it references a portion

determined only on a fractional or percentage basis. The amendments are

generally effective in the case of estates of decedents dying after

October 24, 1992 (the date of enactment) and to gifts made after that

date, subject to certain transitional rules. The legislative history

underlying the amendments provides that no inference should be drawn

from the legislation regarding the law prior to enactment. H.R. Rep.

No. 1018, 102nd Cong. 2d Sess. 432 (1992).

The definition in the proposed regulations of ``specific portion''

as a fractional or percentage interest has been adopted. However, for

estates coming within the purview of the transitional rule of Public

Law 102-486 the definition of specific portion in the final regulations

adopts the proposed amendments to Secs. 20.2056(b)-5 and 25.2523(e)-1,

which reflect the decision in Northeastern Pennsylvania National Bank.

The corresponding proposed amendments to Secs. 20.2056(b)-7 and

25.2523(f)-1 (and pertinent portions of the proposed amendments to

Secs. 20.2044-1 and 25.2519-1) have also been retained in the final

regulations. In addition, the IRS recognizes that Estate of Alexander

reflects the law prior to enactment of Public Law 102-486, with respect

to interests within the purview of sections 2056(b)(5) and 2523(e) and

the final regulations also incorporate this decision, subject to the

Public Law 102-486 effective date and transitional rules.

The IRS recognizes that some aspects of the 1992 legislation should

be the subject of separate proposed regulations under section

2056(b)(7). For example, the IRS invites comments on the application of

the Energy Policy Act of 1992 to the treatment of annuities as

described in the last sentence of section 2056(b)(7)(B)(ii). Send

comments to: CC:DOM:CORP:T:R, room 5528, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington, DC 20044.

In response to comments, Example 4 of Sec. 20.2056(b)-5(c)(5) has

been revised to eliminate the reference to the office building in the

facts. The example, as revised, focuses on the definition of ``specific

portion'' under section 2056(b)(5) and the amount deductible under the

facts presented. A similar revision was made to Example 4 of

Sec. 25.2523(e)-1(c)(5) which contains similar facts.

In response to comments, Sec. 20.2056(b)-7(b)(3), as proposed, has

been revised to clarify that an executor who is appointed, qualified

and acting within the United States, within the meaning of section

2203, is responsible for making the QTIP election, even with respect to

property that is not in the executor's possession, such as an inter

vivos trust established by the decedent. If there is no executor

appointed, the person in actual or constructive possession of the

qualifying income interest property may make the election.

Paragraph (c) of Sec. 20.2056(b)-7, has been added, in response to

comments, to provide limited circumstances under which a protective

QTIP election is recognized for estate tax purposes. In general, the

protective election will be recognized only if, at the time the return

is filed, a bona fide issue is presented the resolution of which is

uncertain at the time the federal estate tax return is filed, that

concerns whether an asset is includible in the decedent's gross estate,

or the amount or nature of the property the surviving spouse is

entitled to receive. Because of changes made to Schedule M of Form 706,

it was deemed unnecessary to provide for a protective election for a

trust that fails to meet the requirements of section 2056(b)(5). The

availability of a protective gift tax QTIP election was considered but

rejected because of the perceived absence of a need for such an

election.

Section 20.2056(b)-7(d)(3) retains the position of the proposed

regulations that an income interest does not qualify as a qualifying

income interest for life if the income interest is contingent on the

executor's election of QTIP treatment; for example, if the spouse is

entitled to trust income only if the executor makes the QTIP election

with respect to the trust. This issue has been the subject of recent

litigation. Although the Tax Court has agreed with the position of the

proposed regulations, the Eighth Circuit and the Fifth Circuit have

reversed the Tax Court on this issue. Estate of Robertson v.

Commissioner, No. 93-2488 (8th Cir. February 4, 1994), rev'g 98 T.C.

678 (1992); Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir.

1992), rev'g 97 T.C. 327 (1991). See also, Estate of Spencer v.

Commissioner, T.C. Memo 1992-579, appeal docketed, No. 93-1997 (6th

Cir. July 26, 1993). In Estate of Robertson and Estate of Clayton, the

appellate courts found that under section 2056(b)(7)(B), qualified

terminable interest property is defined inter alia as property for

which an election is made. Thus, qualification of property as qualified

terminable interest property is always contingent on the executor's

election. Qualification for the marital deduction is determined as of

the time of death. The IRS continues to believe, consistent with the

conclusion reached by the Tax Court, that if the substantive rights and

interests the spouse receives in trust property are dependent on the

executor's post-death exercise of discretionary authority, the rights

and interests received by the spouse cannot properly be characterized

as qualifying as of the time of death, nor can the rights and interests

received by the spouse be characterized as passing from the decedent to

the spouse, as required under section 2056(a). The appellate courts

take the position that the statutory language supports the allowance of

the marital deduction if the receipt of the requisite substantive

rights and interests is contingent on making the election. This is

inconsistent with the fundamental principle that qualification of an

interest in property for the marital deduction is determined as of the

date of death. Accordingly, the Service believes that the statute does

not authorize a grant of discretion to the executor to create

substantive rights in the spouse, and the final regulations reflect

this position.

Example (14) of Sec. 20.2056(b)-7(e), as proposed, has not been

adopted. This example illustrated that an annuity purchased by an

executor pursuant to a directive of the decedent qualifies as qualified

terminable interest property under section 2056(b)(7). The example was

in conflict with section 2056(b)(1)(C), which provides that a marital

deduction is not allowed with respect to any terminable interest (i.e.,

any interest that will terminate or fail on the occurrence of a

specified event, or due to lapse of time) if the interest is to be

acquired by the executor for the surviving spouse pursuant to the

directions of the decedent (e.g., a will direction to purchase an

annuity for the spouse.) Section 2056(b)(7), which provides an

exception allowing a deduction for terminable interests described in

section 2056(b)(1)(A), does not provide an exception for interests

described in section 2056(b)(1)(C). Section 20.2056(b)-7(c) of the

final regulations reflects this fact.

Section 2056(b)(7)(C), added to the Code by the Technical and

Miscellaneous Revenue Act of 1988, and amended by the Omnibus Budget

Reconciliation Act of 1989, provides for an automatic section

2056(b)(7) election (and deduction) in the case of an annuity

includible in the decedent's gross estate under section 2039, where

only the surviving spouse has the right to receive payments before the

death of the surviving spouse. With respect to the gift tax, the

qualification of a spouse's interest in a joint and survivor annuity

that is the subject of a gift under section 2511 is now governed by

section 2523(f)(6), also added by TAMRA in 1988. This section provides

for an automatic election if only the donor and the donor's spouse have

a right to receive payments prior to the death of the last spouse to

die. Rules governing the application of section 2056(b)(7)(C), as well

as section 2523(f)(6), will be prescribed under regulations to be

proposed under those sections at a later date.

Example 10 of Sec. 20.2056(b)-7(e), as proposed, considered the

treatment of a spousal annuity payable from a decedent's individual

retirement account. In response to comments, this example has been

retained as an illustration of an interest that qualifies as a

qualifying income interest for life under section 2056(b)(7)(B)(ii),

without regard to section 2056(b)(7)(C). However, the IRS recognizes

that the arrangement described in the example may also qualify, at

least in part, for the automatic election and deduction under section

2056(b)(7)(C), and this question will be considered in regulations to

be proposed under that section at a later date.

Section 20.2056(b)-7(b), as proposed, provided that a marital trust

that qualifies under section 2056(b)(7) may be divided into separate

trusts to reflect a partial election with respect to the trust. This

provision has been clarified to specify that the severance of the trust

must occur no later than the termination of the period of estate

administration. Further, the provision has been clarified to indicate

that although the severed trusts must be funded based on fair market

values on the date of division, the trusts need not be funded with a

pro rata portion of each asset. Example 4 of Sec. 20.2056(b)-7(h) has

been added to illustrate this provision.

Section 20.2056(b)-8, as proposed, has been revised to provide that

a charitable remainder trust described in section 664 may qualify for a

marital deduction under section 2056(b)(7) in situations where the

surviving spouse is not the only noncharitable beneficiary of the

charitable remainder trust (e.g., where the trust provides for a

successive life beneficiary on the spouse's death). However, in view of

the enactment of section 1941 of The Energy Policy Act of 1992

(discussed above), this provision is limited in application to those

estates not subject to the 1992 amendments to the Code. A similar

change (with similar limitations) was made to Sec. 25.2523(g)-1, as

proposed, providing that a charitable remainder trust in which the

donor's spouse is a noncharitable beneficiary can qualify as qualified

terminable interest property under section 2523(f), even if the trust

fails to qualify under section 2523(g) (because, for example, the donor

and the donor's spouse are not the only noncharitable beneficiaries of

the trust.)

The IRS requests comments on whether the unitrust or annuity

interest in a charitable remainder trust described in sections

664(d)(1) or (d)(2) qualifies as a qualifying income interest for life

in view of the 1992 amendments. See, e.g., the last sentence of section

2056(b)(7)(B)(ii).

Sections 20.2056(b)-9 and 25.2523(h)-1 have been added to reflect

the addition of sections 2056(b)(9) and 2523(h) (denial of double

deduction) to the Code by the Technical Corrections Act of 1982.

Sections 20.2056(c)-1A and 20.2056(c)-2A, as proposed, have not

been adopted by the final regulations. These sections contained

comprehensive rules for computing the amount of the allowable estate

tax marital deduction in the case of estates of decedents dying in 1977

through 1981. In general, the allowable marital deduction applicable to

these estates was limited in amount to the greater of $250,000 or one-

half of the adjusted gross estate. The section, as proposed, also

contained rules promulgated under the transitional rules accompanying

section 2002(d)(1) of the Tax Reform Act of 1976 (which increased the

limitation on the allowable marital deduction to the greater of

$250,000 or one-half of the adjusted gross estate), and the

transitional rule under section 403(e) of the Economic Recovery Tax Act

of 1981 (which enacted the unlimited marital deduction).

In general, the comprehensive rules discussing the computation of

the amount of the marital deduction under the statutory changes enacted

in 1976 will only apply to the estates of decedents who died in 1977

through 1981 and, in some cases, estates of decedents dying after 1981

if the decedent's will was executed prior to 1982. In view of the

limited continuing applicability of these rules, they have not been

adopted by the final regulations. Similarly, the transitional rules

primarily involved estates of decedents dying after 1981 under wills or

other testamentary instruments executed prior to 1982. Many of the

issues involving the application of these transitional rules have been

settled by litigation. See, e.g., Estate of Niesen v. Commissioner, 865

F.2d 162 (8th Cir. 1988); Estate of Levitt v. Commissioner, 95 T.C. 289

(1990); Estate of Christmas v. Commissioner, 91 T.C. 769 (1988).

Accordingly, the proposed regulations discussing these rules have also

not been adopted. A short reference to these rules has been added to

Sec. 20.2056(a)-1 of the regulations.

Section 22.2056-1 is removed, since this temporary regulation

(which considered the requirements for a partial QTIP election) has

been incorporated into the final regulations contained in this

document.

Section 25.2519-1(c), as proposed, discussed the amount of the gift

under section 2519 if the surviving spouse transfers all or a part of

the spouse's income interest in property subject to a QTIP election

under either section 2056(b)(7) or section 2523(f). Under section

2207A(b), the spouse has a right to recover from the persons receiving

the transferred property any gift tax imposed on the transfer. Section

25.2519-1(a), as proposed, provided that in determining the amount of

the gift under section 2519, the value of the transfer is reduced by

the amount of the gift tax reimbursement. That is, the section 2519

gift was proposed to be treated as a ``net gift.'' See, e.g., Rev. Rul.

75-72, 1975-1 C.B. 310. However, the section 2207A(b) reimbursement

provision could be viewed as shifting the liability for the gift tax

imposed on the transfer to the persons receiving the property.

Arguably, payment by those persons of a gift tax for which they are

liable under the statute should not reduce the amount of the transfer

for gift tax purposes, or otherwise result in net gift treatment. See,

e.g., Rev. Rul. 80-111, 1980-1 C.B. 208. Accordingly, the reference in

Sec. 25.2519-1(c), treating the transfer as a net gift, has been

deleted. The IRS anticipates that the issue regarding net gift

treatment will be the subject of subsequent proposed regulations and

specifically requests comments on this issue.

Section 25.2519-1(a) and Examples 4 and 5 of Sec. 25.2519-1(g) have

been revised to reflect the application of section 2702 as added to the

Code by the Revenue Reconciliation Act of 1990.

Section 25.2523(f)-1(b)(4), as proposed, discussed the manner and

time for making the gift tax qualified terminable interest property

election. That section has been revised in the final regulations in

order to reflect the changes made to section 2523(f)(4)(A) by the Tax

Reform Act of 1986. Under section 2523(f)(4)(A), as amended, the gift

tax election is to be made on or before the date prescribed by section

6075(b) for filing a gift tax return (including extensions authorized

under section 6075(b)(2), relating to automatic extensions of time for

filing a gift tax return where the taxpayer is granted an extension of

time to file the income tax return.) The section, as proposed, has also

been revised to permit QTIP elections to be made on returns for which

extensions have been granted pursuant to section 6081(a) of the Code.

Comments have been received suggesting that an inter vivos transfer

in trust where the donor retains an income interest and the spouse

receives the right to trust income on the termination of the donor's

preceding life income interest should qualify as qualified terminable

interest property under section 2523(f). These comments were rejected.

In general, the statute requires that the spouse must be entitled to

receive the trust income for the spouse's life. An income interest that

commences at some time in the future, if the spouse survives until that

time, is not payable to the spouse for life as required by the statute.

Further, if such an interest were allowed to qualify under section

2523(f), it is problematical whether, in the event the donee spouse

predeceased the donor spouse, the IRS could sustain inclusion of the

trust corpus in the gross estate of the donee spouse under section 2044

(or sustain treating the assignment of the spouse's interest as a

disposition under section 2519), since, as noted above, it is

questionable whether such an interest constitutes a qualifying income

interest for life. Accordingly, Sec. 25.2523(f)-1(c)(2) has been added

to clarify that, in order to constitute a qualifying income interest

for life, the spouse must receive the immediate right to receive the

income from the property.

Examples 9, 10, and 11 of Sec. 25.2523(f)-1(f) have been added,

illustrating the application of section 2523(f)(5) and Sec. 25.2523(f)-

1(d). Under these sections, where the donor spouse retains an interest

in a trust subject to a section 2523(f) QTIP election (e.g., the trust

provides an income interest to the spouse for life, then to the donor

for life, with remainder to children), the trust corpus is not subject

to inclusion in the donor's gross estate under section 2036 (by virtue

of the retained life estate) if the donor predeceases the spouse.

Further, any transfer of the retained interest during the donor's

lifetime prior to the death of the donee spouse is not subject to gift

tax. However, under section 2523(f)(5)(B), this exclusion rule does not

apply if, prior to the donor's death (or the transfer of the interest),

the property is included in the donee spouse's gross estate under

section 2044 or is treated as a gift by the donee spouse under section

2519. The examples clarify, inter alia, that if the property is

included in the donee spouse's gross estate (or is subject to a gift

tax under section 2519), the donee spouse is treated as the transferor

of the property for estate and gift tax purposes. Accordingly, on the

subsequent death of the donor spouse, the donor is not treated as the

transferor of the property in which the donor possesses an income

interest. In such circumstances, notwithstanding section 2523(f)(5)(B),

the property is not includible in the donor's gross estate under

section 2036. However, the property could be subject to inclusion in

the donor's gross estate under another applicable section of the Code,

the application of which is not dependent on the donor's status as a

transferor of the property. For example, if the donee spouse's estate

made an election under section 2056(b)(7) with respect to the property,

then the property would be includible in the donor spouse's gross

estate under section 2044 (a so-called lifetime reverse QTIP trust).

Sections 20.2056(a)-1(a), 20.2056(b)-7(e), 25.2523(a)-(1)(a),

25.2523(a)-1(c) and 25.6019-1, as proposed, have been revised to refer

to the changes made by the Technical and Miscellaneous Revenue Act of

1988 and the Omnibus Budget Reconciliation Act of 1989, in regard to

the availability of the estate tax marital deduction where the

surviving spouse is not a United States citizen and the gift tax

marital deduction where the donee spouse is not a United States

citizen.

Several minor clarifying amendments have been made to the text and

the examples in the proposed regulations to better describe the intent

and scope of those provisions.

Effective Dates

Except as specifically provided in Secs. 20.2044-2, 20.2056(b)-

5(c)(3)(ii) and (iii), 20.2056(b)-7(e)(5), 20.2056(b)-8(b), 25.2519-2,

25.2523(e)-1(c)(3), 25.2523(f)-1(c)(3) and 25.2523(g)-1(b), these

regulations are effective in the case of estates of decedents dying

after March 1, 1994, and to gifts made after that date. With respect to

estates of decedents dying on or before March 1, 1994, or gifts made on

or before that date, taxpayers may rely on any reasonable

interpretation of the statutory provisions. For this purpose, the

proposed regulations published in the Federal Register on May 21, 1984

(49 FR 21350) are considered a reasonable interpretation of the

statutory provisions.

Special Analysis

It has been determined that this Treasury decision is not a

significant regulatory action as defined in Executive Order 12866. It

also has been determined that section 553(b) of the Administrative

Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act

(5 U.S.C. chapter 6) do not apply to these regulations, and therefore,

a Regulatory Flexibility Analysis is not required.

Drafting Information

The principal author of these regulations is Susan Hurwitz of the

Office of Chief Counsel, Internal Revenue Service. Other personnel from

the IRS and Treasury Department participated in developing these

regulations.

List of Subjects

26 CFR Part 20

Estate tax, Reporting and recordkeeping requirements.

26 CFR Part 22

Estate tax, Reporting and recordkeeping requirements.

26 CFR Part 25

Gift taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 20, 22, 25, and 602 are amended as

follows:

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

1954

Paragraph 1. The authority citation for part 20 is revised to read

as follows:

Authority: 26 U.S.C. 7805.

Section 20.2031-7 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5).

Section 20.2031-10 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5).

Section 20.2032-1 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5).

Section 20.2055-2 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(50).

Section 20.2204-1 also issued under 26 U.S.C. 6324A(a).

Section 20.2204-3 also issued under 26 U.S.C. 6324A(a).

Section 20.6324A-1 also issued under 26 U.S.C. 6324A(a).

Section 20.6324B-1 also issued under 26 U.S.C. 6324B.

Par. 1a. The authority citations immediately following

Secs. 20.2031-7, 20.2031-10, 20.2032-1, 20.2055-2, 20.2204-1, 20.2204-

3, 20.6324A-1 and 20.6324B-1 are removed.

Sec. 20.0-1 [Amended]

Par. 2. In Sec. 20.0-1(b)(1), the last sentence is amended by

removing the reference ``20.2056(e)-3'' and adding ``20.2056(d)-1'' in

its place.

Par. 3. Section 20.2012-1 is amended as follows:

a. In paragraph (a), the first sentence is revised to read as set

forth below.

b. In paragraph (d)(2)(ii), the fourth and fifth sentences are

removed.

c. Paragraph (d)(3) is removed.

Sec. 20.2012-1 Credit for gift tax.

(a) In general. With respect to gifts made before 1977, a credit is

allowed under section 2012 against the Federal estate tax for gift tax

paid under chapter 12 of the Internal Revenue Code, or corresponding

provisions of prior law, on a gift by the decedent of property

subsequently included in the decedent's gross estate. * * *

* * * * *

Par. 4. Section 20.2013-4, paragraph (b)(3)(ii) is amended by

removing the second sentence.

Par. 5. Section 20.2014-3 is amended as follows:

a. The concluding text of paragraph (b) immediately following

paragraph (b)(2) is revised to read as set forth below.

b. Paragraph (c), Example (3)(ii), second sentence, is revised to

read as set forth below.

Sec. 20.2014-3 Second limitation.

* * * * *

(b) * * *

Any reduction described in paragraph (b)(1) or (b)(2) of this

section on account of the marital deduction must proportionately take

into account, if applicable, the limitation on the aggregate amount of

the marital deduction contained in Sec. 20.2056(a)-1(c). See

Sec. 20.2014-3(c), Example 3.

Example 3. * * *

(ii) * * * Assume that the limitation imposed by section 2056(c),

as in effect before 1982, is applicable so that the aggregate allowable

marital deduction is limited to one-half the adjusted gross estate, or

$400,000 (which is 50 percent of $800,000). * * *

* * * * *

Par. 6. Section 20.2044-1 is redesignated Sec. 20.2045-1 and new

Secs. 20.2044-1 and 20.2044-2 are added to read as follows:

Sec. 20.2044-1 Certain property for which marital deduction was

previously allowed.

(a) In general. Section 2044 generally provides for the inclusion

in the gross estate of property in which the decedent had a qualifying

income interest for life and for which a deduction was allowed under

section 2056(b)(7) or 2523(f). The value of the property included in

the gross estate under section 2044 is not reduced by the amount of any

section 2503(b) exclusion that applied to the transfer creating the

interest. See section 2207A, regarding the right of recovery against

the persons receiving the property that is applicable in certain cases.

(b) Passed from. For purposes of section 1014 and chapters 11 and

13 of subtitle B of the Internal Revenue Code, property included in a

decedent's gross estate under section 2044 is considered to have been

acquired from or to have passed from the decedent to the person

receiving the property upon the decedent's death. Thus, for example,

the property is treated as passing from the decedent for purposes of

determining the availability of the charitable deduction under section

2055, the marital deduction under section 2056, and special use

valuation under section 2032A. In addition, the tax imposed on property

includible under section 2044 is eligible for the installment payment

of estate tax under section 6166.

applies to the entire value of the trust at the surviving spouse's

death. If a marital deduction is taken on either the estate or gift tax

return with respect to the transfer which created the qualifying income

interest, it is presumed that the deduction was allowed for purposes of

section 2044. To avoid the inclusion of property in the decedent-

spouse's gross estate under this section, the executor of the spouse's

estate must establish that a deduction was not taken for the transfer

which created the qualifying income interest. For example, to establish

that a deduction was not taken, the executor may produce a copy of the

estate or gift tax return filed with respect to the transfer by the

first spouse or the first spouse's estate establishing that no

deduction was taken under section 2523(f) or section 2056(b)(7). In

addition, the executor may establish that no return was filed on the

original transfer by the decedent because the value of the first

spouse's gross estate was below the threshold requirement for filing

under section 6018. Similarly, the executor could establish that the

transfer creating the decedent's qualifying income interest for life

was made before the effective date of section 2056(b)(7) or section

2523(f).

(d) Amount included--(1) In general. The amount included under this

section is the value of the entire interest in which the decedent had a

qualifying income interest for life, determined as of the date of the

decedent's death (or the alternate valuation date, if applicable). If,

in connection with the transfer of property that created the decedent's

qualifying income interest for life, a deduction was allowed under

section 2056(b)(7) or section 2523(f) for less than the entire interest

in the property (i.e., for a fractional or percentage share of the

entire interest in the transferred property), the amount includible in

the decedent's gross estate under this section is equal to the fair

market value of the entire interest in the property on the date of the

decedent's death (or the alternate valuation date, if applicable)

multiplied by the fractional or percentage share of the interest for

which the deduction was taken.

(2) Inclusion of income. If any income from the property for the

period between the date of the transfer creating the decedent-spouse's

interest and the date of the decedent-spouse's death has not been

distributed before the decedent-spouse's death, the undistributed

income is included in the decedent-spouse's gross estate under this

section to the extent that the income is not so included under any

other section of the Internal Revenue Code.

(3) Reduction of includible share in certain cases. If only a

fractional or percentage share is includible under this section, the

includible share is appropriately reduced if--

(i) The decedent-spouse's interest was in a trust and distributions

of principal were made to the spouse during the spouse's lifetime;

(ii) The trust provides that the distributions are to be made from

the qualified terminable interest share of the trust; and

(iii) The executor of the decedent-spouse's estate can establish

the reduction in that share based on the fair market value of the trust

assets at the time of each distribution.

(4) Interest in previously severed trust. If the decedent-spouse's

interest was in a trust consisting of only qualified terminable

interest property and the trust was severed (in compliance with

Sec. 20.2056(b)-7(b) or Sec. 25.2523(f)-1(b) of this chapter) from a

trust that, after the severance, held only property that was not

qualified terminable interest property, only the value of the property

in the severed portion of the trust is includible in the decedent-

spouse's gross estate.

(e) Examples. The following examples illustrate the principles in

paragraphs (a) through (d) of this section, where the decedent, D, was

survived by spouse, S.

Example 1. Inclusion of trust subject to election. Under D's

will, assets valued at $800,000 in D's gross estate (net of debts,

expenses and other charges, including death taxes, payable from the

property) passed in trust with income payable to S for life. Upon

S's death, the trust principal is to be distributed to D's children.

D's executor elected under section 2056(b)(7) to treat the entire

trust property as qualified terminable interest property and claimed

a marital deduction of $800,000. S made no disposition of the income

interest during S's lifetime under section 2519. On the date of S's

death, the fair market value of the trust property was $740,000. S's

executor did not elect the alternate valuation date. The amount

included in S's gross estate pursuant to section 2044 is $740,000.

Example 2. Inclusion of trust subject to partial election. The

facts are the same as in Example 1, except that D's executor elected

under section 2056(b)(7) with respect to only 50 percent of the

value of the trust ($400,000). Consequently, only the equivalent

portion of the trust is included in S's gross estate; i.e., $370,000

(50 percent of $740,000).

Example 3. Spouse receives qualifying income interest in a

fraction of trust income. Under D's will, assets valued at $800,000

in D's gross estate (net of debts, expenses and other charges,

including death taxes, payable from the property) passed in trust

with 20 percent of the trust income payable to S for S's life. The

will provides that the trust principal is to be distributed to D's

children upon S's death. D's executor elected to deduct, pursuant to

section 2056(b)(7), 50 percent of the amount for which the election

could be made; i.e., $80,000 (50 percent of 20 percent of $800,000).

Consequently, on the death of S, only the equivalent portion of the

trust is included in S's gross estate; i.e., $74,000 (50 percent of

20 percent of $740,000).

Example 4. Distribution of corpus during spouse's lifetime. The

facts are the same as in Example 3, except that S was entitled to

receive all the trust income but the executor of D's estate elected

under section 2056(b)(7) with respect to only 50 percent of the

value of the trust ($400,000). Pursuant to authority in the will,

the trustee made a discretionary distribution of $100,000 of

principal to S in 1995 and charged the entire distribution to the

qualified terminable interest share. Immediately prior to the

distribution, the fair market value of the trust property was

$1,100,000 and the qualified terminable interest portion of the

trust was 50 percent. Immediately after the distribution, the

qualified terminable interest portion of the trust was 45 percent

($450,000 divided by $1,000,000). Provided S's executor can

establish the relevant facts, the amount included in S's gross

estate is $333,000 (45 percent of $740,000).

Example 5. Spouse assigns a portion of income interest during

life. Under D's will, assets valued at $800,000 in D's gross estate

(net of debts, expenses and other charges, including death taxes,

payable from the property) passed in trust with all the income

payable to S, for S's life. The will provides that the trust

principal is to be distributed to D's children upon S's death. D's

executor elected under section 2056(b)(7) to treat the entire trust

property as qualified terminable interest property and claimed a

marital deduction of $800,000. During the term of the trust, S

transfers to C the right to 40 percent of the income from the trust

for S's life. Because S is treated as transferring the entire

remainder interest in the trust corpus under section 2519 (as well

as 40 percent of the income interest under section 2511), no part of

the trust is includible in S's gross estate under section 2044.

However, if S retains until death an income interest in 60 percent

of the trust corpus (which corpus is treated pursuant to section

2519 as having been transferred by S for both gift and estate tax

purposes), 60 percent of the property will be includible in S's

gross estate under section 2036(a) and a corresponding adjustment is

made in S's adjusted taxable gifts.

Example 6. Inter vivos trust subject to election under section

2523(f). D transferred $800,000 to a trust providing that trust

income is to be paid annually to S, for S's life. The trust provides

that upon S's death, $100,000 of principal is to be paid to X

charity and the remaining principal distributed to D's children. D

elected to treat all of the property transferred to the trust as

qualified terminable interest property under section 2523(f). At the

time of S's death, the fair market value of the trust is $1,000,000.

S's executor does not elect the alternate valuation date. The amount

included in S's gross estate is $1,000,000; i.e., the fair market

value at S's death of the entire trust property. The $100,000 that

passes to X charity on S's death is treated as a transfer by S to X

charity for purposes of section 2055. Therefore, S's estate is

allowed a charitable deduction for the $100,000 transferred from the

trust to the charity to the same extent that a deduction would be

allowed by section 2055 for a bequest by S to X charity.

Example 7. Spousal interest in the form of an annuity. D died

prior to October 24, 1992, the effective date of the Energy Policy

Act of 1992 (Pub. L. 102-486). See Sec. 20.2056(b)-7(e). Under D's

will, assets valued at $500,000 in D's gross estate (net of debts,

expenses and other charges, including death taxes, payable from the

property) passed in trust pursuant to which an annuity of $20,000 a

year was payable to S for S's life. Trust income not paid to S as an

annuity is to be accumulated in the trust and may not be distributed

during S's lifetime. D's estate deducted $200,000 under section

2056(b)(7) and Sec. 20.2056(b)-7(e)(2). S did not assign any portion

of S's interest during S's life. At the time of S's death, the value

of the trust property is $800,000. S's executor does not elect the

alternate valuation date. The amount included in S's gross estate

pursuant to section 2044 is $320,000 ([$200,000/$500,000] x

$800,000).

Sec. 20.2044-2 Effective dates.

Except as specifically provided in Example 7 of Sec. 20.2044-1(e),

the provisions of Sec. 20.2044-1 are effective with respect to estates

of a decedent-spouse dying after March 1, 1994. With respect to estates

of decedent-spouses dying on or before such date, taxpayers may rely on

any reasonable interpretation of the statutory provisions. For these

purposes, the provisions of Sec. 20.2044-1 (as well as project LR-211-

76, 1984-1 C.B., page 598, see Sec. 601.601(d)(2)(ii)(b) of this

chapter), are considered a reasonable interpretation of the statutory

provisions.

Par. 7. Section 20.2055-6 is added to read as follows:

Sec. 20.2055-6 Disallowance of double deduction in the case of

qualified terminable interest property.

No deduction is allowed from the decedent's gross estate under

section 2055 for property with respect to which a deduction is allowed

by reason of section 2056(b)(7). See section 2056(b)(9) and

Sec. 20.2056(b)-9.

Par. 8. Section 20.2056-0 is added to read as follows:

Sec. 20.2056-0 Table of contents.

This section lists the captions that appear in the regulations

under Secs. 20.2056(a)-1 through 20.2056(d)-2.

Sec. 20.2056(a)-1 Marital deduction; in general.

(a) In general.

(b) Requirements for marital deduction.

(1) In general.

(2) Burden of establishing requisite facts.

(1) Estates of decedents dying before 1977.

(2) Estates of decedents dying after December 31, 1976, and before

January 1, 1982.

(3) Estates of decedents dying after December 31, 1981.

Sec. 20.2056(a)-2 Marital deduction; deductible interests and

nondeductible interests.

(a) In general.

(b) Deductible interests.

Sec. 20.2056(b)-1 Marital deduction; limitation in case of life estate

or other ``terminable interest.''

(a) In general.

(b) Terminable interests.

(d) Exceptions.

(e) Miscellaneous principles.

(f) Direction to acquire a terminable interest.

(g) Examples.

Sec. 20.2056(b)-2 Marital deduction; interest in unidentified assets.

(a) In general.

(b) Application of section 2056(b)(2).

(d) Example.

Sec. 20.2056(b)-3 Marital deduction; interest of spouse conditioned on

survival for limited period.

(a) In general.

(b) Six months' survival.

(d) Examples.

Sec. 20.2056(b)-4 Marital deduction; valuation of interest passing to

surviving spouse.

(a) In general.

(b) Property interest subject to an encumbrance or obligation.

(d) Remainder interests.

Sec. 20.2056(b)-5 Marital deduction; life estate with power of

appointment in surviving spouse.

(a) In general.

(b) Specific portion; deductible amount.

(1) In general.

(2) Fraction or percentage share.

(3) Special rule in the case of estates of decedents dying on or

before October 24, 1992, and certain decedents dying after October 24,

1992, with wills or revocable trusts executed on or prior to that date.

(4) Local law.

(5) Examples.

(d) Meaning of entire interest.

(e) Application of local law.

(f) Right to income.

(g) Power of appointment in surviving spouse.

(h) Requirement of survival for a limited period.

(j) Existence of power in another.

Sec. 20.2056(b)-6 Marital deduction; life insurance or annuity

payments with power of appointment in surviving spouse.

(a) In general.

(b) Specific portion; deductible interest.

(d) Payments of installments or interest.

(e) Powers of appointment.

Sec. 20.2056(b)-7 Election with respect to life estate for surviving

spouse.

(a) In general.

(b) Qualified terminable interest property.

(1) In general.

(2) Property for which an election may be made.

(3) Persons permitted to make the election.

(4) Manner and time of making the election.

(1) In general.

(2) Protective election irrevocable.

(d) Qualifying income interest for life.

(1) In general.

(2) Entitled for life to all income.

(3) Contingent income interests.

(4) Income between last distribution date and spouse's date of

death.

(5) Pooled income funds.

(6) Power to distribute principal to spouse.

(e) Annuities payable from trusts in the case of estates of

decedents dying on or before October 24, 1992, and certain decedents

dying after October 24, 1992, with wills or revocable trusts executed

on or prior to that date.

(1) In general.

(2) Deductible interest.

(3) Distributions permissible only to surviving spouse.

(4) Applicable interest rate.

(5) Effective dates.

(f) Joint and survivor annuities. [Reserved]

(g) Application of local law.

(h) Examples.

Sec. 20.2056(b)-8 Special rule for charitable remainder trusts.

(a) In general.

(1) Surviving spouse only noncharitable beneficiary.

(2) Interest for life or term of years.

(3) Payment of state death taxes.

(b) Charitable trusts where surviving spouse is not the only

noncharitable beneficiary.

Sec. 20.2056(b)-9 Denial of double deduction.

Sec. 20.2056(b)-10 Effective dates.

Sec. 20.2056(c)-1 Marital deduction; definition of passed from the

decedent.

(a) In general.

(b) Expectant interest in property under community property laws.

Sec. 20.2056(c)-2 Marital deduction; definition of ``passed from the

decedent to his surviving spouse.''

(a) In general.

(b) Examples.

(d) Will contests.

(e) Survivorship.

Sec. 20.2056(c)-3 Marital deduction; definition of passed from the

decedent to a person other than his surviving spouse.

Sec. 20.2056(d)-1 Marital deduction; effect of disclaimers of post-

December 31, 1976 transfers.

(a) Disclaimer by a surviving spouse.

(b) Disclaimer by a person other than a surviving spouse.

Sec. 20.2056(d)-2 Marital deduction; effect of disclaimers of pre-

January 1, 1977 transfers.

(a) Disclaimers by a surviving spouse.

(b) Disclaimer by a person other than a surviving spouse.

(1) Decedents dying after October 3, 1966, and before January 1,

1977.

(2) Decedents dying after September 30, 1963, and before October 4,

1966.

(3) Decedents dying before October 4, 1966.

Par. 9. Section 20.2056(a)-1 is revised to read as follows:

Sec. 20.2056(a)-1 Marital deduction; in general.

(a) In general. A deduction is allowed under section 2056 from the

gross estate of a decedent for the value of any property interest which

passes from the decedent to the decedent's surviving spouse if the

interest is a deductible interest as defined in Sec. 20.2056(a)-2. With

respect to decedents dying in certain years, a deduction is allowed

under section 2056 only to the extent that the total of the deductible

interests does not exceed the applicable limitations set forth in

paragraph (c) of this section. The deduction allowed under section 2056

is referred to as the marital deduction. See also sections 2056(d) and

2056A for special rules applicable in the case of decedents dying after

November 10, 1988, if the decedent's surviving spouse is not a citizen

of the United States at the time of the decedent's death. In such

cases, the marital deduction may not be allowed unless the property

passes to a qualified domestic trust as described in section 2056A(a).

(b) Requirements for marital deduction--(1) In general. To obtain

the marital deduction with respect to any property interest, the

executor must establish the following facts--

(i) The decedent was survived by a spouse (see Sec. 20.2056(c)-

2(e));

(ii) The property interest passed from the decedent to the spouse

(see Secs. 20.2056(b)-5 through 20.2056(b)-8 and 20.2056(c)-1 through

20.2056(c)-3);

(iii) The property interest is a deductible interest (see

Sec. 20.2056(a)-2); and

(iv) The value of the property interest (see Sec. 20.2056(b)-4).

(2) Burden of establishing requisite facts. The executor must

provide the facts relating to any applicable limitation on the amount

of the allowable marital deduction under Sec. 20.2056(a)-1(c), and must

submit proof necessary to establish any fact required under paragraph

(b)(1), including any evidence requested by the district director.

Estates of decedents dying before 1977. In the case of estates of

decedents dying before January 1, 1977, the marital deduction is

limited to one-half of the value of the adjusted gross estate, as that

term was defined under section 2056(c)(2) prior to repeal by the

Economic Recovery Tax Act of 1981.

(2) Estates of decedents dying after December 31, 1976, and before

January 1, 1982--Except as provided in Sec. 2002(d)(1) of the Tax

Reform Act of 1976 (Pub. L. 94-455), in the case of decedents dying

after December 31, 1976, and before January 1, 1982, the marital

deduction is limited to the greater of--

(i) $250,000; or

(ii) One-half of the value of the decedent's adjusted gross estate,

adjusted for intervivos gifts to the spouse as prescribed by section

2056(c)(1)(B) prior to repeal by the Economic Recovery Tax Act of 1981

(Pub. L. 97-34).

(3) Estates of decedents dying after December 31, 1981. In the case

of estates of decedents dying after December 31, 1981, the marital

deduction is limited as prescribed in paragraph (c)(2) of this section

if the provisions of Sec. 403(e)(3) of Pub. L. 97-34 are satisfied.

Par. 10. Section 20.2056(a)-2 is amended as follows:

a. In paragraph (a), a paragraph heading is added and the last

sentence is revised.

b. In paragraph (b), a paragraph heading is added.

c. The additions and revisions read as follows:

Sec. 20.2056(a)-2 Marital deduction; deductible interests and

nondeductible interests.

(a) In general. * * * Subject to any applicable limitations set

forth in Sec. 20.2056(a)-1(c), the amount of the marital deduction is

the aggregate value of the deductible interests.

(b) Deductible interests. * * *

* * * * *

Par. 11. Section 20.2056(b)-1 is amended as follows:

a. Paragraphs (d)(2) and (d)(3) are revised.

b. Paragraphs (d)(4) and (d)(5) are added.

c. Paragraph (e)(4) is revised.

d. In paragraph (g), the introductory text is revised.

e. The revisions and additions read as follows:

Sec. 20.2056(b)-1 Marital deduction; limitation in case of life estate

or other terminable interest.

* * * * *

(d) * * *

(2) It is a right to income for life with a general power of

appointment, meeting the requirements set forth in Sec. 20.2056(b)-5;

(3) It consists of life insurance or annuity payments held by the

insurer with a general power of appointment in the spouse, meeting the

requirements set forth in Sec. 20.2056(b)-6;

(4) It is qualified terminable interest property, meeting the

requirements set forth in Sec. 20.2056(b)-7; or

(5) It is an interest in a qualified charitable remainder trust in

which the spouse is the only noncharitable beneficiary, meeting the

requirements set forth in Sec. 20.2056(b)-8.

(e) * * *

(4) The terms passed from the decedent, passed from the decedent to

his surviving spouse and passed from the decedent to a person other

than his surviving spouse are defined in Secs. 20.2056(c)-1 through

20.2056(c)-3.

* * * * *

(g) Examples. The application of this section may be illustrated by

the following examples. In each example, it is assumed that the

executor made no election under section 2056(b)(7) (even if under the

specific facts the election would have been available), that any

property interest passing from the decedent to a person other than the

surviving spouse passed for less than full and adequate consideration

in money or money's worth, and that section 2056(b)(8) is inapplicable.

* * * * *

Par. 12. In Sec. 20.2056(b)-2, headings are added to paragraphs (a)

through (d) to read as follows:

Sec. 20.2056(b)-2 Marital deduction; interest in unidentified assets.

(a) In general. * * *

(b) Application of section 2056(b)(2). * * *

* * * * *

(d) Example. * * *

* * * * *

Sec. 20.2056(b)-4 [Amended]

Par. 13. In Sec. 20.2056(b)-4, paragraph (b) is amended by removing

the fifth sentence.

Par. 14. Section 20.2056(b)-5 is amended as follows:

a. Paragraph (c) is revised to read as set forth below.

b. The heading and first sentence of paragraph (d) are revised to

read as set forth below.

Sec. 20.2056(b)-5 Marital deduction; life estate with power of

appointment in surviving spouse.

* * * * *

in paragraphs (c)(2) and (c)(3) of this section, a partial interest in

property is not treated as a specific portion of the entire interest.

In addition, any specific portion of an entire interest in property is

nondeductible to the extent the specific portion is subject to invasion

for the benefit of any person other than the surviving spouse, except

in the case of a deduction allowable under section 2056(b)(5), relating

to the exercise of a general power of appointment by the surviving

spouse.

(2) Fraction or percentage share. Under section 2056(b)(10), a

partial interest in property is treated as a specific portion of the

entire interest if the rights of the surviving spouse in income, and

the required rights as to the power described in Sec. 20.2056(b)-5(a),

constitute a fractional or percentage share of the entire property

interest, so that the surviving spouse's interest reflects its

proportionate share of the increase or decrease in the value of the

entire property interest to which the income rights and the power

relate. Thus, if the spouse's right to income and the spouse's power

extend to a specified fraction or percentage of the property, or the

equivalent, the interest is in a specific portion of the property. In

accordance with paragraph (b) of this section, if the spouse has the

right to receive the income from a specific portion of the trust

property (after applying paragraph (c)(3) of this section) but has a

power of appointment over a different specific portion of the property

(after applying paragraph (c)(3) of this section), the marital

deduction is limited to the lesser specific portion.

(3) Special rule in the case of estates of decedents dying on or

before October 24, 1992, and certain decedents dying after October 24,

1992, with wills or revocable trusts executed on or prior to that date.

(i) In the case of estates of decedents within the purview of the

effective date and transitional rules contained in paragraphs (c)(3)

(ii) and (iii) of this section:

(A) A specific sum payable annually, or at more frequent intervals,

out of the property and its income that is not limited by the income of

the property is treated as the right to receive the income from a

specific portion of the property. The specific portion, for purposes of

paragraph (c)(2) of this section, is the portion of the property that,

assuming the interest rate generally applicable for the valuation of

annuities at the time of the decedent's death, would produce income

equal to such payments. However, a pecuniary amount payable annually to

a surviving spouse is not treated as a right to the income from a

specific portion of the trust property for purposes of this paragraph

(c)(3)(i)(A) if any person other than the surviving spouse may receive,

during the surviving spouse's lifetime, any distribution of the

property. To determine the applicable interest rate for valuing

annuities, see sections 2031 and 7520 and the regulations under those

sections.

(B) The right to appoint a pecuniary amount out of a larger fund

(or trust corpus) is considered the right to appoint a specific portion

of such fund or trust for purposes of paragraph (c)(2) in an amount

equal to such pecuniary amount.

(ii) The rules contained in paragraphs (c)(3)(i) (A) and (B) of

this section apply with respect to estates of decedents dying on or

before October 24, 1992.

(iii) The rules contained in paragraphs (c)(3)(i) (A) and (B) of

this section apply in the case of decedents dying after October 24,

1992, if property passes to the spouse pursuant to a will or revocable

trust agreement executed on or before October 24, 1992, and either--

(A) On that date, the decedent was under a mental disability to

change the disposition of the property and did not regain competence to

dispose of such property before the date of death; or

(B) The decedent dies prior to October 24, 1995.

(iv) Notwithstanding paragraph (c)(3)(iii) of this section,

paragraphs (c)(3)(i) (A) and (B) of this section do not apply if the

will or revocable trust is amended after October 24, 1992, in any

respect that increases the amount of the transfer qualifying for the

marital deduction or alters the terms by which the interest so passes

to the surviving spouse of the decedent.

(4) Local law. A partial interest in property is treated as a

specific portion of the entire interest if it is shown that the

surviving spouse has rights under local law that are identical to those

the surviving spouse would have acquired had the partial interest been

expressed in terms satisfying the requirements of paragraph (c)(2) (or

paragraph (c)(3) if applicable) of this section.

(5) Examples. The following examples illustrate the application of

paragraphs (a) through (c)(4) of this section:

Example 1. Spouse entitled to the lesser of an annuity or a

fraction of trust income. The decedent, D, died prior to October 24,

1992. D bequeathed in trust 500 identical shares of X company stock,

valued for estate tax purposes at $500,000. The trust provides that

during the lifetime of D's spouse, S, the trustee is to pay annually

to S the lesser of one-half of the trust income or $20,000. Any

trust income not paid to S is to be accumulated in the trust and may

not be distributed during S's lifetime. S has a testamentary general

power of appointment over the entire trust principal. The applicable

interest rate for valuing annuities as of D's date of death under

section 7520 is 10 percent. For purposes of paragraphs (a) through

from the lesser of--

(i) One half of the stock ($250,000); or

(ii) $200,000, the specific portion of the stock which, as

determined in accordance with Sec. 20.2056(b)-5(c)(3)(i)(A), would

produce annual income of $20,000 (20,000/.10). Accordingly, the

marital deduction is limited to $200,000 (200,000/500,000 or \2/5\

of the value of the trust).

Example 2. Spouse possesses power and income interest over

different specific portions of trust. The facts are the same as in

Example 1 except that S's testamentary general power of appointment

is exercisable over only \1/4\ of the trust principal. Consequently,

under section 2056(b)(5), the marital deduction is allowable only

for the value of \1/4\ of the trust ($125,000); i.e., the lesser of

the value of the portion with respect to which S is deemed to be

entitled to all of the income (\2/5\ of the trust or $200,000), or

the value of the portion with respect to which S possesses the

requisite power of appointment (\1/4\ of the trust or $125,000).

Example 3. Power of appointment over pecuniary amount. The

decedent, D, died prior to October 24, 1992. D bequeathed property

valued at $400,000 for estate tax purposes in trust. The trustee is

to pay annually to D's spouse, S, one-fourth of the trust income.

Any trust income not paid to S is to be accumulated in the trust and

may not be distributed during S's lifetime. The will gives S a

testamentary general power of appointment over the sum of $160,000.

Because D died prior to October 24, 1992, S's power of appointment

over $160,000 is treated as a power of appointment over a specific

portion of the entire trust interest. The marital deduction

allowable under section 2056(b)(5) is limited to $100,000; that is,

the lesser of--

(1) The value of the trust corpus ($400,000);

(2) The value of the trust corpus over which S has a power of

appointment ($160,000); or

(3) That specific portion of the trust with respect to which S

is entitled to all the income ($100,000).

Example 4. Power of appointment over shares of stock constitutes

a power over a specific portion. Under D's will, 250 shares of Y

company stock were bequeathed in trust pursuant to which all trust

income was payable annually to S, D's spouse, for life. S was given

a testamentary general power of appointment over 100 shares of

stock. The trust provides that if the trustee sells the Y company

stock, S's general power of appointment is exercisable with respect

to the sale proceeds or the property in which the proceeds are

reinvested. Because the amount of property represented by a single

share of stock would be altered if the corporation split its stock,

issued stock dividends, made a distribution of capital, etc., a

power to appoint 100 shares at the time of S's death is not

necessarily a power to appoint the entire interest that the 100

shares represented on the date of D's death. If it is shown that,

under local law, S has a general power to appoint not only the 100

shares designated by D but also 100/250 of any distributions by the

corporation that are included in trust principal, the requirements

of paragraph (c)(2) of this section are satisfied and S is treated

as having a general power to appoint 100/250 of the entire interest

in the 250 shares. In that case, the marital deduction is limited to

40 percent of the trust principal. If local law does not give S that

power, the 100 shares would not constitute a specific portion under

Sec. 20.2056(b)-5(c) (including Sec. 20.2056(b)-5(c)(3)(i)(B)). The

nature of the asset is such that a change in the capitalization of

the corporation could cause an alteration in the original value

represented by the shares at the time of D's death and, thus, it

does not represent a specific portion of the trust.

(d) Meaning of entire interest. Because a marital deduction is

allowed for each separate qualifying interest in property passing from

the decedent to the decedent's surviving spouse (subject to any

applicable limitations in Sec. 20.2056(a)-l(c)), for purposes of

paragraphs (a) and (b) of this section, each property interest with

respect to which the surviving spouse received any rights is considered

separately in determining whether the surviving spouse's rights extend

to the entire interest or to a specific portion of the entire interest.

* * *

* * * * *

Par. 15. Sections 20.2056(b)-7 through 20.2056(b)-10 are added to

read as follows:

Sec. 20.2056(b)-7 Election with respect to life estate for surviving

spouse.

(a) In general. Subject to section 2056(d), a marital deduction is

allowed under section 2056(b)(7) with respect to estates of decedents

dying after December 31, 1981, for qualified terminable interest

property as defined in paragraph (b) of this section. All of the

property for which a deduction is allowed under this paragraph (a) is

treated as passing to the surviving spouse (for purposes of

Sec. 20.2056(a)-1), and no part of the property is treated as passing

to any person other than the surviving spouse (for purposes of

Sec. 20.2056(b)-1).

(b) Qualified terminable interest property--(1) In general. Section

2056(b)(7)(B)(i) provides the definition of qualified terminable

interest property.

(i) Terminable interests described in section 2056(b)(1)(C) cannot

qualify as qualified terminable interest property. Thus, if the

decedent directs the executor to purchase a terminable interest with

estate assets, the terminable interest acquired will not qualify as

qualified terminable interest property.

(ii) For purposes of section 2056(b)(7)(B)(i), the term property

generally means the entire interest in property (within the meaning of

Sec. 20.2056(b)-5(d)) or a specific portion of the entire interest

(within the meaning of Sec. 20.2056(b)-5(c)).

(2) Property for which an election may be made--(i) In general. The

election may relate to all or any part of property that meets the

requirements of section 2056(b)(7)(B)(i), provided that any partial

election must be made with respect to a fractional or percentage share

of the property so that the elective portion reflects its proportionate

share of the increase or decrease in value of the entire property for

purposes of applying sections 2044 or 2519. The fraction or percentage

may be defined by formula.

(ii) Division of trusts--(A) In general. A trust may be divided

into separate trusts to reflect a partial election that has been made,

or is to be made, if authorized under the governing instrument or

otherwise permissible under local law. Any such division must be

accomplished no later than the end of the period of estate

administration. If, at the time of the filing of the estate tax return,

the trust has not yet been divided, the intent to divide the trust must

be unequivocally signified on the estate tax return.

(B) Manner of dividing and funding trust. The division of the trust

must be done on a fractional or percentage basis to reflect the partial

election. However, the separate trusts do not have to be funded with a

pro rata portion of each asset held by the undivided trust.

required, either by applicable local law or by the express or implied

provisions of the governing instrument, to divide the trust on the

basis of the fair market value of the assets of the trust at the time

of the division.

(3) Persons permitted to make the election. The election referred

to in section 2056(b)(7)(B)(i)(III) must be made by the executor that

is appointed, qualified, and acting within the United States, within

the meaning of section 2203, regardless of whether the property with

respect to which the election is to be made is in the executor's

possession. If there is no executor appointed, qualified, and acting

within the United States, the election may be made by any person with

respect to property in the actual or constructive possession of that

person and may also be made by that person with respect to other

property not in the actual or constructive possession of that person if

the person in actual or constructive possession of such other property

does not make the election. For example, in the absence of an appointed

executor, the trustee of an intervivos trust (that is included in the

gross estate of the decedent) can make the election.

(4) Manner and time of making the election--(i) In general. The

election referred to in section 2056(b)(7)(B)(i)(III) and (v) is made

on the return of tax imposed by section 2001 (or section 2101). For

purposes of this paragraph, the term return of tax imposed by section

2001 means the last estate tax return filed by the executor on or

before the due date of the return, including extensions or, if a timely

return is not filed, the first estate tax return filed by the executor

after the due date.

(ii) Election irrevocable. The election, once made, is irrevocable,

provided that an election may be revoked or modified on a subsequent

return filed on or before the due date of the return, including

extensions actually granted. If an executor appointed under local law

has made an election on the return of tax imposed by section 2001 (or

section 2101) with respect to one or more properties, no subsequent

election may be made with respect to other properties included in the

gross estate after the return of tax imposed by section 2001 is filed.

An election under section 2056(b)(7)(B)(v) is separate from any

elections made under section 2056A(a)(3).

be made to treat property as qualified terminable interest property

only if, at the time the federal estate tax return is filed, the

executor of the decedent's estate reasonably believes that there is a

bona fide issue that concerns whether an asset is includible in the

decedent's gross estate, or the amount or nature of the property the

surviving spouse is entitled to receive, i.e., whether property that is

includible is eligible for the qualified terminable interest property

election. The protective election must identify either the specific

asset, group of assets, or trust to which the election applies and the

specific basis for the protective election.

(2) Protective election irrevocable. The protective election, once

made on the return of tax imposed by section 2001, cannot be revoked.

For example, if a protective election is made on the basis that a bona

fide question exists regarding the inclusion of a trust corpus in the

gross estate and it is later determined that the trust corpus is so

includible, the protective election becomes effective with respect to

the trust corpus and cannot thereafter be revoked.

(d) Qualifying income interest for life--(1) In general. Section

2056(b)(7)(B)(ii) provides the definition of qualifying income interest

for life. For purposes of section 2056(b)(7)(B)(ii)(II), the surviving

spouse is included within the prohibited class of powerholders referred

to therein.

(2) Entitled for life to all income. The principles of

Sec. 20.2056(b)-5(f), relating to whether the spouse is entitled for

life to all of the income from the entire interest, or a specific

portion of the entire interest, apply in determining whether the

surviving spouse is entitled for life to all of the income from the

property regardless of whether the interest passing to the spouse is in

trust.

(3) Contingent income interests. An income interest granted for a

term of years, or a life estate subject to termination upon the

occurrence of a specified event (e.g., remarriage), is not a qualifying

income interest for life. In addition, an income interest (or life

estate) that is contingent upon the executor's election under section

2056(b)(7)(B)(v) is not a qualifying income interest for life,

regardless of whether the election is actually made.

(4) Income between last distribution date and date of spouse's

death. An income interest does not fail to constitute a qualifying

income interest for life solely because income between the last

distribution date and the date of the surviving spouse's death is not

required to be distributed to the surviving spouse or to the estate of

the surviving spouse. See Sec. 20.2044-1 relating to the inclusion of

such undistributed income in the gross estate of the surviving spouse.

(5) Pooled income funds. An income interest in a pooled income fund

described in section 642(c)(5) constitutes a qualifying income interest

for life for purposes of section 2056(b)(7)(B)(ii).

(6) Power to distribute principal to spouse. An income interest in

a trust will not fail to constitute a qualifying income interest for

life solely because the trustee has a power to distribute principal to

or for the benefit of the surviving spouse. The fact that property

distributed to a surviving spouse may be transferred by the spouse to

another person does not result in a failure to satisfy the requirement

of section 2056(b)(7)(B)(ii)(II). However, if the surviving spouse is

legally bound to transfer the distributed property to another person

without full and adequate consideration in money or money's worth, the

requirement of section 2056(b)(7)(B)(ii)(II) is not satisfied.

(e) Annuities payable from trusts in the case of estates of

decedents dying on or before October 24, 1992, and certain decedents

dying after October 24, 1992, with wills or revocable trusts executed

on or prior to that date--(1) In general. In the case of estates of

decedents within the purview of the effective date and transitional

rules contained in Sec. 20.2056(b)-7(e)(5), a surviving spouse's

lifetime annuity interest payable from a trust or other group of assets

passing from the decedent is treated as a qualifying income interest

for life for purposes of section 2056(b)(7)(B)(ii).

(2) Deductible interest. The deductible interest, for purposes of

Sec. 20.2056(a)-2(b), is the specific portion of the property that,

assuming the applicable interest rate for valuing annuities, would

produce income equal to the minimum amount payable annually to the

surviving spouse. If, based on the applicable interest rate, the entire

property from which the annuity may be satisfied is insufficient to

produce income equal to the minimum annual payment, the value of the

deductible interest is the entire value of the property. The value of

the deductible interest may not exceed the value of the property from

which the annuity is payable. If the annual payment may increase, the

increased amount is not taken into account in valuing the deductible

interest.

(3) Distributions permissible only to surviving spouse. An annuity

interest is not treated as a qualifying income interest for life for

purposes of section 2056(b)(7)(B)(ii) if any person other than the

surviving spouse may receive, during the surviving spouse's lifetime,

any distribution of the property or its income (including any

distribution under an annuity contract) from which the annuity is

payable.

(4) Applicable interest rate. To determine the applicable interest

rate for valuing annuities, see sections 2031 and 7520 and the

regulations under those sections.

(5) Effective dates. (i) The rules contained in Sec. 20.2056(b)-

7(e) apply with respect to estates of decedents dying on or before

October 24, 1992.

(ii) The rules contained in Sec. 20.2056(b)-7(e) apply in the case

of decedents dying after October 24, 1992, if property passes to the

spouse pursuant to a will or revocable trust executed on or before

October 24, 1992, and either--

(A) On that date, the decedent was under a mental disability to

change the disposition of his property and did not regain his

competence to dispose of such property before the date of death; or

(B) The decedent dies prior to October 24, 1995.

(iii) Notwithstanding the foregoing, the rules contained in

Sec. 20.2056(b)-7(e) do not apply if the will or revocable trust is

amended after October 24, 1992, in any respect that increases the

amount of the transfer qualifying for the marital deduction or alters

the terms by which the interest so passes to the surviving spouse.

(f) Joint and survivor annuities. [Reserved]

(g) Application of local law. The provisions of local law are taken

into account in determining whether the conditions of section

2056(b)(7)(B)(ii)(I) are satisfied. For example, silence of a trust

instrument as to the frequency of payment is not regarded as a failure

to satisfy the requirement that the income must be payable to the

surviving spouse annually or more frequently unless applicable local

law permits payments less frequently.

(h) Examples. The following examples illustrate the application of

paragraphs (a) through (g) of this section. In each example, it is

assumed that the decedent, D, was survived by S, D's spouse and that,

unless stated otherwise, S is not the trustee of any trust established

for S's benefit.

Example 1. Life estate in residence. D owned a personal

residence valued at $250,000 for estate tax purposes. Under D's

will, the exclusive and unrestricted right to use the residence

(including the right to continue to occupy the property as a

personal residence or to rent the property and receive the income)

passes to S for life. At S's death, the property passes to D's

children. Under applicable local law, S must consent to any sale of

the property. If the executor elects to treat all of the personal

residence as qualified terminable interest property, the deductible

interest is $250,000, the value of the residence for estate tax

purposes.

Example 2. Power to make property productive. D's will

established a trust funded with property valued for estate tax

purposes at $500,000. The assets include both income producing

assets and non-productive assets. S was given the power, exercisable

annually, to require distribution of all of the trust income to

herself. No trust property may be distributed during S's lifetime to

any person other than S. Applicable local law permits S to require

that the trustee either make the trust property productive or sell

the property and reinvest in productive property within a reasonable

time after D's death. If the executor elects to treat all of the

trust as qualified terminable interest property, the deductible

interest is $500,000. If the executor elects to treat only 20

percent of the trust as qualified terminable interest property, the

deductible interest is $100,000, i.e., 20 percent of $500,000.

Example 3. Power of distribution over fraction of trust income.

The facts are the same as in Example 2 except that S is given the

right exercisable annually for S's lifetime to require distribution

to herself of only 50 percent of the trust income for life. The

remaining trust income is to be accumulated or distributed among S

and the decedent's children in the trustee's discretion. The maximum

amount that D's executor may elect to treat as qualified terminable

interest property is $250,000; i.e., the estate tax value of the

trust ($500,000) multiplied by the percentage of the trust in which

S has a qualifying income interest for life (50 percent). If D's

executor elects to treat only 20 percent of the portion of the trust

in which S has a qualifying income interest as qualified terminable

interest property, the deductible interest is $50,000, i.e., 20

percent of $250,000.

Example 4. Power to distribute trust corpus to other

beneficiaries. D's will established a trust providing that S is

entitled to receive at least annually all the trust income. The

trustee is given the power to use annually during S's lifetime

$5,000 from the trust for the maintenance and support of S's minor

child, C. Any such distribution does not necessarily relieve S of

S's obligation to support and maintain C. S does not have a

qualifying income interest for life in any portion of the trust

because the bequest fails to satisfy the condition that no person

have a power, other than a power the exercise of which takes effect

only at or after S's death, to appoint any part of the property to

any person other than S. The trust would also be nondeductible under

section 2056(b)(7) if S, rather than the trustee, held the power to

appoint a portion of the principal to C. However, in the latter

case, if S made a qualified disclaimer (within the meaning of

section 2518) of the power to appoint to C, the trust could qualify

for the marital deduction pursuant to section 2056(b)(7), assuming

that the power is personal to S and S's disclaimer terminates the

power. Similarly, in either case, if C made a qualified disclaimer

of C's right to receive distributions from the trust, the trust

would qualify under section 2056(b)(7), assuming that C's disclaimer

effectively negates the trustee's power under local law.

Example 5. Spouse's income interest terminable on remarriage.

D's will established a trust providing that all of the trust income

is payable at least annually to S for S's lifetime, provided that,

if S remarries, S's interest in the trust will pass to X. The trust

is not deductible under section 2056(b)(7). S's income interest is

not a qualifying income interest for life because it is not for life

but, rather, is terminable upon S's remarriage.

Example 6. Spouse's income interest contingent on executor's

election. D's will established a trust providing that S is entitled

to receive the income from that portion of the trust that the

executor elects to treat as qualified terminable interest property.

S does not have a qualifying income interest for life in any portion

of the trust because the income interest is contingent upon the

executor's election. Accordingly, the executor cannot elect

qualified terminable interest treatment for any portion of the

trust. If the decedent's will gives the surviving spouse a

qualifying income interest for life in a specific portion of the

trust (such as the minimum portion of the trust that is necessary to

reduce the Federal estate tax to zero) and the interest is not

contingent on the executor's election, the executor can elect

qualified terminable interest treatment for the specified portion of

the trust.

Example 7. Formula partial election. D's will established a

trust funded with the residue of D's estate. Trust income is to be

paid annually to S for life, and the principal is to be distributed

to D's children upon S's death. S has the power to require that all

the trust property be made productive. There is no power to

distribute trust property during S's lifetime to any person other

than S. D's executor elects to deduct a fractional share of the

residuary estate under section 2056(b)(7). The election specifies

that the numerator of the fraction is the amount of deduction

necessary to reduce the Federal estate tax to zero (taking into

account final estate tax values) and the denominator of the fraction

is the final estate tax value of the residuary estate (taking into

account any specific bequests or liabilities of the estate paid out

of the residuary estate). The formula election is of a fractional

share. The value of the share qualifies for the marital deduction

even though the executor's determinations to claim administration

expenses as estate or income tax deductions and the final estate tax

values will affect the size of the fractional share.

Example 8. Formula partial election. The facts are the same as

in Example 7 except that, rather than defining a fraction, the

executor's formula states: ``I elect to treat as qualified

terminable interest property that portion of the residuary trust, up

to 100 percent, necessary to reduce the Federal estate tax to zero,

after taking into account the available unified credit, final estate

tax values and any liabilities and specific bequests paid from the

residuary estate.'' The formula election is of a fractional share.

The share is equivalent to the fractional share determined in

Example 7.

Example 9. Severance of QTIP trust. D's will established a trust

funded with the residue of D's estate. Trust income is to be paid

annually to S for life, and the principal is to be distributed to

D's children upon S's death. S has the power to require that all of

the trust property be made productive. There is no power to

distribute trust property during S's lifetime to any person other

than S. D's will authorizes the executor to make the election under

section 2056(b)(7) only with respect to the minimum amount of

property necessary to reduce estate taxes on D's estate to zero,

authorizes the executor to divide the residuary estate into two

separate trusts to reflect the election, and authorizes the executor

to charge any payment of principal to S to the qualified terminable

interest trust. S is the sole beneficiary of both trusts during S's

lifetime. The authorizations in the will do not adversely affect the

allowance of the marital deduction. Only the property remaining in

the marital deduction trust, after payment of principal to S, is

subject to inclusion in S's gross estate under section 2044 or

subject to gift tax under section 2519.

Example 10. Payments to spouse from individual retirement

account. S is the life beneficiary of sixteen remaining annual

installments payable from D's individual retirement account. The

terms of the account provide for the payment of the account balance

in nineteen annual installments that commenced when D reached age

70\1/2\. Each installment is equal to all the income earned on the

remaining principal in the account plus a share of the remaining

principal equal to \1/19\ in the first year, \1/18\ in the second

year, \1/17\ in the third year, etc. Under the terms of the account,

S has no right to withdraw any other amounts from the account. Any

payments remaining after S's death pass to D's children. S's

interest in the account qualifies as a qualifying income interest

for life under section 2056(b)(7)(B)(ii), without regard to the

provisions of section 2056(b)(7)(C).

Example 11. Spouse's interest in trust in the form of an

annuity. D died prior to October 24, 1992. D's will established a

trust funded with income producing property valued at $500,000 for

estate tax purposes. The trustee is required by the trust instrument

to pay $20,000 a year to S for life. Trust income in excess of the

annuity amount is to be accumulated in the trust and may not be

distributed during S's lifetime. S's lifetime annuity interest is

treated as a qualifying income interest for life. If the executor

elects to treat the entire portion of the trust in which S has a

qualifying income interest as qualified terminable interest

property, the value of the deductible interest is (assuming that 10

percent is the applicable interest rate under section 7520 for

valuing annuities on the appropriate valuation date) $200,000,

because that amount would yield an income to S of $20,000 a year.

Example 12. Value of spouse's annuity exceeds value of trust

corpus. The facts are the same as in Example 11 except that the

trustee is required to pay S $70,000 a year for life. If the

executor elects to treat the entire portion of the trust in which S

has a qualifying income interest as qualified terminable interest

property, the value of the deductible interest is $500,000, which is

the lesser of the entire value of the property ($500,000), or the

amount of property that (assuming a 10 percent interest rate) would

yield an income to S of $70,000 a year ($700,000).

Example 13. Pooled income fund. D's will provides for a bequest

of $200,000 to a pooled income fund described in section 642(c)(5),

designating S as the income beneficiary for life. If D's executor

elects to treat the entire $200,000 as qualified terminable interest

property, the deductible interest is $200,000.

Example 14. Funding severed QTIP trusts. D's will established a

trust satisfying the requirements of section 2056(b)(7). Pursuant to

the authority in D's will and Sec. 20.2056(b)-7(b)(2)(ii), D's

executor indicates on the Federal estate tax return that an election

under section 2056(b)(7) is being made with respect to 50 percent of

the trust, and that the trust will subsequently be divided to

reflect the partial election on the basis of the fair market value

of the property at the time of the division. D's executor funds the

trust at the end of the period of estate administration. At that

time, the property available to fund the trusts consists of 100

shares of X Corporation stock with a current value of $400,000 and

200 shares of Y Corporation stock with a current value of $400,000.

D may fund each trust with the stock of either or both corporations,

in any combination, provided that the aggregate value of the stock

allocated to each trust is $400,000.

Sec. 20.2056(b)-8 Special rule for charitable remainder trusts.

(a) In general--(1) Surviving spouse only noncharitable

beneficiary. With respect to estates of decedents dying after December

31, 1981, subject to section 2056(d), if the surviving spouse of the

decedent is the only noncharitable beneficiary of a charitable

remainder annuity trust or a charitable remainder unitrust described in

section 664 (qualified charitable remainder trust), section 2056(b)(1)

does not apply to the interest in the trust that is transferred to the

surviving spouse. Thus, the value of the annuity or unitrust interest

passing to the spouse qualifies for a marital deduction under section

2056(b)(8) and the value of the remainder interest qualifies for a

charitable deduction under section 2055. If an interest in property

qualifies for a marital deduction under section 2056(b)(8), no election

may be made with respect to the property under section 2056(b)(7). For

purposes of this section, the term non-charitable beneficiary means any

beneficiary of the qualified charitable remainder trust other than an

organization described in section 170(c).

(2) Interest for life or term of years. The surviving spouse's

interest need not be an interest for life to qualify for a marital

deduction under section 2056(b)(8). However, for purposes of section

664, an annuity or unitrust interest payable to the spouse for a term

of years cannot be payable for a term that exceeds 20 years.

(3) Payment of state death taxes. A deduction is allowed under

section 2056(b)(8) even if the transfer to the surviving spouse is

conditioned on the spouse's payment of state death taxes, if any,

attributable to the qualified charitable remainder trust. See

Sec. 20.2056(b)-4(c) for the effect of such a condition on the amount

of the deduction allowable.

(b) Charitable remainder trusts where the surviving spouse is not

the only noncharitable beneficiary. In the case of a charitable

remainder trust where the decedent's spouse is not the only

noncharitable beneficiary (for example, where the noncharitable

interest is payable to the decedent's spouse for life and then to

another individual for life), the qualification of the interest as

qualified terminable interest property is determined solely under

section 2056(b)(7) and not under section 2056(b)(8). Accordingly, if

the decedent died on or before October 24, 1992, or the trust otherwise

comes within the purview of the transitional rules contained in

Sec. 20.2056(b)-7(e)(5), the spousal annuity or unitrust interest may

qualify under Sec. 20.2056(b)-(7)(e) as a qualifying income interest

for life.

Sec. 20.2056(b)-9 Denial of double deduction.

The value of an interest in property may not be deducted for

Federal estate tax purposes more than once with respect to the same

decedent. For example, where a decedent transfers a life estate in a

farm to the spouse with a remainder to charity, the entire property is,

pursuant to the executor's election under section 2056(b)(7), treated

as passing to the spouse. The entire value of the property qualifies

for the marital deduction. No part of the value of the property

qualifies for a charitable deduction under section 2055 in the

decedent's estate.

Sec. 20.2056(b)-10 Effective dates.

Except as specifically provided in Secs. 20.2056(b)-5(c)(3) (ii)

and (iii), 20.2056(b)-7(e)(5), and 20.2056(b)-8(b), the provisions of

Secs. 20.2056(b)-5(c), 20.2056(b)-7, 20.2056(b)-8, and 20.2056(b)-9 are

effective with respect to estates of decedents dying after March 1,

1994. With respect to estates of decedents dying on or before such

date, the executor of the decedent's estate may rely on any reasonable

interpretation of the statutory provisions. For these purposes, the

provisions of Secs. 20.2056(b)-5(c), 20.2056(b)-7, 20.2056(b)-8, and

20.2056(b)-9 (as well as project LR-211-76, 1984-1 C.B., page 598, see

Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a reasonable

interpretation of the statutory provisions.

Secs. 20.2056(c)-1 and 20.2056(c)-2 [Removed]

Par. 16. Sections 20.2056(c)-1 and 20.2056(c)-2 are removed.

Par. 17. Section 20.2056(e)-1 is redesignated Sec. 20.2056(c)-1 and

amended as follows:

a. The section heading is revised as set forth below.

b. Headings are added for paragraphs (a) and (b) as set forth

below.

c. The last sentence in paragraph (b) is removed.

Sec. 20.2056(c)-1 Marital deduction; definition of passed from the

decedent.

(a) In general. * * *

(b) Expectant interest in property under community property laws. *

* *

Par. 18. Section 20.2056(e)-2 is redesignated Sec. 20.2056(c)-2,

and amended as follows:

a. The section heading is revised.

b. The first sentence of paragraph (a) is amended by removing the

reference ``Sec. 20.2056(e)-l'' and adding ``Sec. 20.2056(c)-1'' in its

place.

c. Paragraphs (a)(2) through (a)(5) are redesignated as paragraphs

(a)(3) through (a)(6), respectively, and a new paragraph (a)(2) is

added.

d. The first sentence in the concluding text of paragraph (a)

following newly designated paragraph (a)(6) is revised.

e. Paragraphs (b)(1)(iv) and (b)(2)(iii) are amended by removing

the reference ``Sec. 20.2056(b)-5'' and adding ``Sec. 20.2056(b)-5 or

20.2056(b)-7'' in its place.

f. Paragraph (b)(3)(v) is amended by removing the reference

``section 2056(b)(5)'' and adding ``Sec. 20.2056(b)-5 or 20.2056(b)-7''

in its place.

g. The revisions and additions read as follows:

Sec. 20.2056(c)-2 Marital deduction; definition of passed from the

decedent to his surviving spouse.

(a) * * *

(2) In the case of certain interests with income for life to the

surviving spouse that the executor elects to treat as qualified

terminable interest property (see Sec. 20.2056(b)-7);

* * * * *

A property interest is treated as passing to the surviving spouse

only if it passes to the spouse as beneficial owner, except to the

extent otherwise provided in Secs. 20.2056(b)-5 through 20.2056(b)-7. *

* *

* * * * *

Sec. 20.2056(e)-3 [Redesignated as Sec. 20.2056(c)-3 and Amended]

Par. 19. Section 20.2056(e)-3 is redesignated Sec. 20.2056(c)-3,

and amended by removing the references to ``Sec. 20.2056(e)-1'' and

``Sec. 20.2056(e)-2'' and adding ``Sec. 20.2056(c)-1'' and

``Sec. 20.2056(c)-2'' in their respective places in the first sentence.

Par. 20. Sections 20.2207A-1 and 20.2207A-2 are added to read as

follows:

Sec. 20.2207A-1 Right of recovery of estate taxes in the case of

certain marital deduction property.

(a) In general--(1) Right of recovery from person receiving the

property. If the gross estate includes the value of property that is

includible by reason of section 2044 (relating to certain property in

which the decedent had a qualifying income interest for life under

sections 2056(b)(7) or 2523(f)), the estate of the surviving spouse is

entitled to recover from the person receiving the property (as defined

in paragraph (d) of this section) the amount of Federal estate tax

attributable to that property. The right of recovery arises when the

Federal estate tax with respect to the property includible in the gross

estate by reason of section 2044 is paid by the estate. There is no

right of recovery from any person for the property received by that

person for which a deduction was allowed from the gross estate if no

tax is attributable to that property.

(2) Failure to exercise right of recovery. Failure of an estate to

exercise a right of recovery under this section upon a transfer subject

to section 2044 is treated as a transfer for Federal gift tax purposes

of the unrecovered amounts from the persons who would benefit from the

recovery to the persons from whom the recovery could have been

obtained. See Sec. 25.2511-1 of this chapter. The transfer is

considered made when the right of recovery is no longer enforceable

under applicable local law. A delay in the exercise of the right of

recovery may be treated as an interest-free loan with appropriate gift

tax consequences under section 7872 depending on the facts of the

particular case.

(3) Waiver of right of recovery. The provisions of Sec. 20.2207A-

1(a)(2) do not apply to the extent that the surviving spouse's will

provides that a recovery shall not be made or to the extent that the

beneficiaries cannot otherwise compel recovery. Thus, e.g., if the

surviving spouse gives the executor of the estate discretion to waive

the right of recovery and the executor waives the right, no gift occurs

under Sec. 25.2511-1 of this chapter if the persons who would benefit

from the recovery cannot compel the executor to exercise the right of

recovery.

(b) Amount of estate tax attributable to property includible under

section 2044. The amount of Federal estate tax attributable to property

includible in the gross estate under section 2044 is the amount by

which the total Federal estate tax (including penalties and interest

attributable to the tax) under chapter 11 of the Internal Revenue Code

that has been paid, exceeds the total Federal estate tax (including

penalties and interest attributable to the tax) under chapter 11 of the

Internal Revenue Code that would have been paid if the value of the

property includible in the gross estate by reason of section 2044 had

not been so included.

estate's right of recovery with respect to a particular property is an

amount equal to the amount determined in paragraph (b) of this section

multiplied by a fraction. The numerator of the fraction is the value

for Federal estate tax purposes of the particular property included in

the gross estate by reason of section 2044, less any deduction allowed

with respect to the property. The denominator of the fraction is the

total value of all properties included in the gross estate by reason of

section 2044, less any deductions allowed with respect to those

properties.

(d) Person receiving the property. If the property is in a trust at

the time of the decedent's death, the person receiving the property is

the trustee and any person who has received a distribution of the

property prior to the expiration of the right of recovery if the

property does not remain in trust. This paragraph (d) does not affect

the right, if any, under local law, of any person with an interest in

property to reimbursement or contribution from another person with an

interest in the property.

(e) Example. The following example illustrates the application of

paragraphs (a) through (d) of this section.

Example. D died in 1994. D's will created a trust funded with

certain income producing assets included in D's gross estate at

$1,000,000. The trust provides that all the income is payable to D's

wife, S, for life, remainder to be divided equally among their four

children. In computing D's taxable estate, D's executor deducted,

pursuant to section 2056(b)(7), $1,000,000. Assume that S received

no other property from D and that S died in 1996. Assume further

that S made no section 2519 disposition of the property, that the

property was included in S's gross estate at a value of $1,080,000,

and that S's will contained no provision regarding section 2207A(a).

The tax attributable to the property is equal to the amount by which

the total Federal estate tax (including penalties and interest) paid

by S's estate exceeds the Federal estate tax (including penalties

and interest) that would have been paid if S's gross estate had been

reduced by $1,080,000. That amount of tax may be recovered by S's

estate from the trust. If, at the time S's estate seeks

reimbursement, the trust has been distributed to the four children,

S's estate is also entitled to recover the tax from the children.

Sec. 20.2207A-2 Effective date.

The provisions of Sec. 20.2207A-1 are effective with respect to

estates of decedents dying after March 1, 1994. With respect to estates

of decedent dying on or before such date, the executor of the

decedent's estate may rely on any reasonable interpretation of the

statutory provisions. For these purposes, the provisions of

Sec. 20.2207A-1 (as well as project LR-211-76, 1984-1 C.B., page 598,

see Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a

reasonable interpretation of the statutory provisions.

PART 22--TEMPORARY ESTATE AND GIFT TAX REGULATIONS UNDER THE

ECONOMIC RECOVERY TAX ACT OF 1981

Par. 21. The authority citation for part 22 is revised to read as

folows:

Authority: 26 U.S.C. 7805.

Sec. 22.2056-1 [Removed]

Par. 22. Section 22.2056-1 is removed.

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

Par. 23. The authority citation for part 25 is revised to read as

follows:

Authority: 26 U.S.C. 7805.

(Section 25.2512-5 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5))

(Section 25.2512-9 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5))

(Section 25.2513-1 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5))

(Section 25.2522(c)-3 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5))

(Section 25.2522(d)-1 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5))

(Section 25.2523(a)-1 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5))

(Section 25.2523(b)-1 also issued under 26 U.S.C. 170(f)(4) and 26

U.S.C. 642(c)(5))

(Section 25.6091-1 also issued under 26 U.S.C. 6091)

Par. 24. The authority citations immediately following

Secs. 25.2512-5, 25.2512-9, 25.2522(c)-3 and 25.2523(a)-1 are removed.

Par. 25. Sections 25.2207A-1 and 25.2207A-2 are added immediately

following the undesignated center heading ``Determination of Tax

Liability'' to read as follows:

Sec. 25.2207A-1 Right of recovery of gift taxes in the case of certain

marital deduction property.

(a) In general. If an individual is treated as transferring an

interest in property by reason of section 2519, the individual or the

individual's estate is entitled to recover from the person receiving

the property (as defined in paragraph (e) of this section) the amount

of gift tax attributable to that property. The value of property to

which this paragraph (a) applies is the value of all interests in the

property other than the qualifying income interest. There is no right

of recovery from any person for the property received by that person

for which a deduction was allowed from the total amount of gifts, if no

Federal gift tax is attributable to the property. The right of recovery

arises at the time the Federal gift tax is actually paid by the

transferor subject to section 2519.

(b) Failure of a person to exercise the right of recovery.

[Reserved].

of Federal gift tax attributable to all properties includible in the

total amount of gifts under section 2519 made during the calendar year

is the amount by which the total Federal gift tax for the calendar year

(including penalties and interest attributable to the tax) under

chapter 12 of the Internal Revenue Code which has been paid, exceeds

the total Federal gift tax for the calendar year (including penalties

and interest attributable to the tax) under chapter 12 of the Internal

Revenue Code which would have been paid if the value of the properties

includible in the total amount of gifts by reason of section 2519 had

not been included.

(d) Amount of gift tax attributable to a particular property. A

person's right of recovery with respect to a particular property is an

amount equal to the amount determined in paragraph (c) of this section

multiplied by a fraction. The numerator of the fraction is the value of

the particular property included in the total amount of gifts made

during the calendar year by reason of section 2519, less any deduction

allowed with respect to the property. The denominator of the fraction

is the total value of all properties included in the total amount of

gifts made during the calendar year by reason of section 2519, less any

deductions allowed with respect to those properties.

(e) Person receiving the property. If the property is in a trust at

the time of the transfer, the person receiving the property is the

trustee, and any person who has received a distribution of the property

prior to the expiration of the right of recovery if the property does

not remain in trust. This paragraph (e) does not affect the right, if

any, under local law, of any person with an interest in property to

reimbursement or contribution from another person with an interest in

the property.

(f) Example. The following example illustrates the application of

paragraphs (a) through (e) of this section.

Example. D created an inter vivos trust during 1994 with certain

income producing assets valued at $1,000,000. The trust provides

that all income is payable to D's wife, S, for S's life, with the

remainder at S's death to be divided equally among their four

children. In computing taxable gifts during calendar year 1994, D

deducted, pursuant to section 2523(f), $1,000,000 from the total

amount of gifts made. In addition, assume that S received no other

transfers from D and that S made a gift during 1996 of the entire

life interest to one of the children, at which time the value of

trust assets was $1,080,000 and the value of S's life interest was

$400,000. Although the entire value of the trust assets ($1,080,000)

is, pursuant to sections 2511 and 2519, included in the total amount

of S's gifts for calendar year 1996, S is only entitled to

reimbursement for the Federal gift tax attributable to the value of

the remainder interest, that is, the Federal gift tax attributable

to $680,000 ($1,080,000 less $400,000). The Federal gift tax

attributable to $680,000 is equal to the amount by which the total

Federal gift tax (including penalties and interest) paid for the

calendar year exceeds the federal gift tax (including penalties and

interest) that would have been paid if the total amount of gifts

during 1996 had been reduced by $680,000. That amount of tax may be

recovered by S from the trust.

Sec. 25.2207A-2 Effective date.

The provisions of Sec. 25.2207A-1 are effective with respect to

dispositions made after March 1, 1994. With respect to gifts made on or

before such date, the donor may rely on any reasonable interpretation

of the statutory provisions. For these purposes, the provisions of

Sec. 25.2207A-1 (as well as project LR-211-76, 1984-1 C.B., page 598,

see Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a

reasonable interpretation of the statutory provisions.

Par. 26. Section 25.2515-1 is amended by:

a. Redesignating paragraph (a) as (a)(3).

b. Adding paragraphs (a)(1) and (2) to read as follows:

Sec. 25.2515-1 Tenancies by the entirety; in general.

(a) Scope--(1) In general. This section and Secs. 25.2515-2 through

25.2515-4 do not apply to the creation of a tenancy by the entirety

after December 31, 1981, and do not reflect changes made to the

Internal Revenue Code by sections 702(k)(1)(A) of the Revenue Act of

1978, or section 2002(c)(2) of the Tax Reform Act of 1976.

(2) Special rule in the case of tenancies created after July 13,

1988, if the donee spouse is not a United States citizen. Under section

2523(i)(3), applicable (subject to the special treaty rule contained in

Public Law 101-239, section 7815(d)(14)) in the case of tenancies by

the entirety and joint tenancies created between spouses after July 13,

1988, if the donee spouse is not a citizen of the United States, the

principles contained in section 2515 and Secs. 25.2515-1 through

25.2515-4 apply in determining the gift tax consequences with respect

to the creation and termination of the tenancy, except that the

election provided in section 2515(a) (prior to repeal by the Economic

Recovery Tax Act of 1981) and Sec. 25.2515-2 (relating to the donor's

election to treat the creation of the tenancy as a transfer for gift

tax purposes) does not apply.

* * * * *

Par. 27. Sections 25.2519-1 and 25.2519-2 are added immediately

after the undesignated center heading ``Deductions'' and before

Sec. 25.2521-1 to read as follows:

Sec. 25.2519-1 Dispositions of certain life estates.

(a) In general. If a donee spouse makes a disposition of all or

part of a qualifying income interest for life in any property for which

a deduction was allowed under section 2056(b)(7) or section 2523(f) for

the transfer creating the qualifying income interest, the donee spouse

is treated for purposes of chapters 11 and 12 of subtitle B of the

Internal Revenue Code as transferring all interests in property other

than the qualifying income interest. For example, if the donee spouse

makes a disposition of part of a qualifying income interest for life in

trust corpus, the spouse is treated under section 2519 as making a

transfer subject to chapters 11 and 12 of the entire trust other than

the qualifying income interest for life. Therefore, the donee spouse is

treated as making a gift under section 2519 of the entire trust less

the qualifying income interest, and is treated for purposes of section

2036 as having transferred the entire trust corpus, including that

portion of the trust corpus from which the retained income interest is

payable. A transfer of all or a portion of the income interest of the

spouse is a transfer by the spouse under section 2511. See also section

2702 for special rules applicable in valuing the gift made by the

spouse under section 2519.

(b) Presumption. Unless the donee spouse establishes to the

contrary, section 2519 applies to the entire trust at the time of the

disposition. If a deduction is taken on either the estate or gift tax

return with respect to the transfer which created the qualifying income

interest, it is presumed that the deduction was allowed for purposes of

section 2519. To avoid the application of section 2519 upon a transfer

of all or part of the donee spouse's income interest, the donee spouse

must establish that a deduction was not taken for the transfer of

property which created the qualifying income interest. For example, to

establish that a deduction was not taken, the donee spouse may produce

a copy of the estate or gift tax return filed with respect to the

transfer creating the qualifying income interest for life establishing

that no deduction was taken under section 2056(b)(7) or section

2523(f). In addition, the donee spouse may establish that no return was

filed on the original transfer by the donor spouse because the value of

the first spouse's gross estate was below the threshold requirement for

filing under section 6018. Similarly, the donee spouse could establish

that the transfer creating the qualifying income interest for life was

made before the effective date of section 2056(b)(7) or section

2523(f), whichever is applicable.

treated as a transfer under this section upon a disposition of all or

part of a qualifying income interest for life in qualified terminable

interest property is equal to the fair market value of the entire

property subject to the qualifying income interest, determined on the

date of the disposition (including any accumulated income and not

reduced by any amount excluded from total gifts under section 2503(b)

with respect to the transfer creating the interest), less the value of

the qualifying income interest in the property on the date of the

disposition. The gift tax consequences of the disposition of the

qualifying income interest are determined separately under

Sec. 25.2511-2.

(2) Disposition of interest in property with respect to which a

partial election was made. If, in connection with the transfer of

property that created the spouse's qualifying income interest for life,

a deduction was allowed under section 2056(b)(7) or section 2523(f) for

less than the entire interest in the property (i.e., for a fractional

or percentage share of the entire interest in the transferred property)

the amount treated as a transfer by the donee spouse under this section

is equal to the fair market value of the entire property subject to the

qualifying income interest on the date of the disposition, less the

value of the qualifying income interest for life, multiplied by the

fractional or percentage share of the interest for which the deduction

was taken.

(3) Reduction for distributions charged to nonelective portion of

trust. The amount determined under paragraph (c)(2) of this section (if

applicable) is appropriately reduced if--

(i) The donee spouse's interest is in a trust and distributions of

principal have been made to the donee spouse;

(ii) The trust provides that distributions of principal are made

first from the qualified terminable interest share of the trust; and

(iii) The donee spouse establishes the reduction in that share

based on the fair market value of the trust assets at the time of each

distribution.

(4) Effect of gift tax recovered under section 2207A on the amount

of the transfer. [Reserved]

(5) Interest in previously severed trust. If the donee spouse's

interest is in a trust consisting of only qualified terminable interest

property, and the trust was previously severed (in compliance with

Sec. 20.2056(b)-7(b)(2)(ii) of this chapter or Sec. 25.2523(f)-

l(b)(3)(ii) from a trust that, after the severance, held only property

that was not qualified terminable interest property, only the value of

the property in the severed portion of the trust at the time of the

disposition is treated as transferred under this section.

(d) Identification of property transferred. If only part of the

property in which a donee spouse has a qualifying income interest for

life is qualified terminable interest property, the donee spouse is, in

the case of a disposition of all or part of the income interest within

the meaning of section 2519, deemed to have transferred a pro rata

portion of the entire qualified terminable interest property for

purposes of this section.

(e) Exercise of power of appointment. The exercise by any person of

a power to appoint qualified terminable interest property to the donee

spouse is not treated as a disposition under section 2519, even though

the donee spouse subsequently disposes of the appointed property.

(f) Conversion of qualified terminable interest property. The

conversion of qualified terminable interest property into other

property in which the donee spouse has a qualifying income interest for

life is not, for purposes of this section, treated as a disposition of

the qualifying income interest. Thus, the sale and reinvestment of

assets of a trust holding qualified terminable interest property is not

a disposition of the qualifying income interest, provided that the

donee spouse continues to have a qualifying income interest for life in

the trust after the sale and reinvestment. Similarly, the sale of real

property in which the spouse possesses a legal life estate and thus

meets the requirements of qualified terminable interest property,

followed by the transfer of the proceeds into a trust which also meets

the requirements of qualified terminable interest property, or by the

reinvestment of the proceeds in income producing property in which the

donee spouse has a qualifying income interest for life, is not

considered a disposition of the qualifying income interest. On the

other hand, the sale of qualified terminable interest property,

followed by the payment to the donee spouse of a portion of the

proceeds equal to the value of the donee spouse's income interest, is

considered a disposition of the qualifying income interest.

(g) Examples. The following examples illustrate the application of

paragraphs (a) through (f) of this section. Except as provided

otherwise in the examples below, assume that the decedent, D, was

survived by spouse, S, that in each example the section 2503(b)

exclusion has already been fully utilized for each year with respect to

the donee in question, and that section 2503(e) is not applicable to

the amount deemed transferred.

Example 1. Transfer of the spouse's life estate in residence.

Under D's will, a personal residence valued for estate tax purposes

at $250,000 passes to S for life, and after S's death to D's

children. D's executor made a valid election to treat the property

as qualified terminable interest property. During 1995, when the

fair market value of the property is $300,000 and the value of S's

life interest in the property is $100,000, S makes a gift of S's

entire interest in the property to D's children. Pursuant to section

2519, S makes a gift in the amount of $200,000 (i.e., the fair

market value of the qualified terminable interest property of

$300,000 less the fair market value of S's qualifying income

interest in the property of $100,000). In addition, under section

2511, S makes a gift of $100,000 (i.e., the fair market value of S's

income interest in the property). See Sec. 25.2511-2.

Example 2. Sale of spouse's life estate. The facts are the same

as in Example 1 except that during 1995, S sells S's interest in the

property to D's children for $100,000. Pursuant to section 2519, S

makes a gift of $200,000 ($300,000 less $100,000 value of the

qualifying income interest in the property). S does not make a gift

of the income interest under section 2511, because the consideration

received for S's income interest is equal to the value of the income

interest.

Example 3. Transfer of income interest in trust subject to

partial election. D's will established a trust valued for estate tax

purposes at $500,000, all of the income of which is payable annually

to S for life. After S's death, the principal of the trust is to be

distributed to D's children. Assume that only 50 percent of the

trust was treated as qualified terminable interest property. During

1995, S makes a gift of all of S's interest in the trust to D's

children at which time the fair market value of the trust is

$400,000 and the fair market value of S's life income interest in

the trust is $100,000. Pursuant to section 2519, S makes a gift of

$150,000 (the fair market value of the qualified terminable interest

property, 50 percent of $400,000, less the $50,000 income interest

in the qualified terminable interest property). S also makes a gift

pursuant to section 2511 of $100,000 (i.e., the fair market value of

S's life income interest).

Example 4. Transfer of a portion of income interest in trust

subject to a partial election. The facts are the same as in Example

3 except that S makes a gift of only 40 percent of S's interest in

the trust. Pursuant to section 2519, S makes a gift of $150,000

(i.e., the fair market value of the qualified terminable interest

property, 50 percent of $400,000, less the $50,000 value of S's

qualified income interest in the qualified terminable interest

property). S also makes a gift pursuant to section 2511 of $40,000

(i.e., the fair market value of 40 percent of S's life income

interest). See also section 2702 for additional rules that may

affect the value of the total amount of S's gift under section 2519

to take into account the fact that S's 30 percent retained income

interest attributable to the qualifying income interest is valued at

zero under that section, thereby increasing the value of S's section

2519 gift to $180,000. In addition, under Sec. 25.2519-1(d), S's

disposition of 40 percent of the income interest is deemed to be a

transfer of a pro rata portion of the qualified terminable interest

property. Thus, assuming no further lifetime dispositions by S, 30

percent (60 percent of 50 percent) of the trust property is included

in S's gross estate under section 2036 and an adjustment is made to

S's adjusted taxable gifts under section 2001(b)(1)(B). If S later

disposes of all or a portion of the retained income interest, see

Sec. 25.2702-6.

Example 5. Transfer of a portion of spouse's interest in a trust

from which corpus was previously distributed to the spouse. D's will

established a trust valued for estate tax purposes at $500,000, all

of the income of which is payable annually to S for life. The

trustee is granted the discretion to distribute trust principal to

S. All appointments of principal must be made from the portion of

the trust subject to the section 2056(b)(7) election. After S's

death, the principal of the trust is to be distributed to D's

children. The executor makes the section 2056(b)(7) election with

respect to 50 percent of the trust. In 1994, pursuant to the terms

of D's will, the trustee distributed $50,000 of principal to S and

charged the entire distribution to the qualified terminable interest

portion of the trust.

Immediately prior to the distribution, the value of the entire

trust was $550,000 and the value of the qualified terminable

interest portion was $275,000 (50 percent of $550,000). Provided S

can establish the above facts, the qualified terminable interest

portion of the trust immediately after the distribution is $225,000

or 45 percent of the value of the trust ($225,000/$500,000). In

1996, when the value of the trust is $400,000 and the value of S's

income interest is $100,000, S makes a transfer of 40 percent of S's

income interest. S's gift under section 2519 is $135,000; i.e., the

fair market value of the qualified terminable interest property, 45

percent of $400,000 ($180,000), less the value of the income

interest in the qualified terminable interest property, $45,000 (45

percent of $100,000). S also makes a gift under section 2511 of

$40,000; i.e., the fair market value of 40 percent of S's income

interest. S's disposition of 40 percent of the income interest is

deemed to be a transfer under section 2519 of the entire 45 percent

portion of the remainder subject to the section 2056(b)(7) election.

Since S retained 60 percent of the income interest, 27 percent (60

percent of 45 percent) of the trust property is includible in S's

gross estate under section 2036. See also section 2702 and Example 4

as to the principles applicable in valuing S's gift under section

2702 and adjusted taxable gifts upon S's subsequent death.

Example 6. Transfer of Spousal Annuity Payable From Trust. D

died prior to October 24, 1992. D's will established a trust valued

for estate tax purposes at $500,000. The trust instrument required

the trustee to pay an annuity to S of $20,000 a year for life. All

the trust income other than the amounts paid to S as an annuity are

to be accumulated in the trust and may not be distributed during S's

lifetime to any person other than S. After S's death, the principal

of the trust is to be distributed to D's children. Because D died

prior to the effective date of section 1941 of the Energy Policy Act

of 1992, S's annuity interest qualifies as a qualifying income

interest for life. Under Sec. 20.2056(b)-7(e) of this chapter, based

on an applicable 10 percent interest rate, 40 percent of the

property, or $200,000, is the value of the deductible interest.

During 1996, S makes a gift of the annuity interest to D's children

at which time the fair market value of the trust is $800,000 and the

fair market value of S's annuity interest in the trust is $100,000.

Pursuant to section 2519, S is treated as making a gift of $220,000

(the fair market value of the qualified terminable interest

property, 40 percent of $800,000 ($320,000), less the $100,000

annuity interest in the qualified terminable interest property). S

is also treated pursuant to section 2511 as making a gift of

$100,000 (the fair market value of S's annuity interest).

Sec. 25.2519-2 Effective date.

Except as specifically provided in Sec. 25.2519-1(g), Example 6,

the provisions of Sec. 25.2519-1 are effective with respect to gifts

made after March 1, 1994. With respect to gifts made on or before such

date, the donee spouse of a section 2056(b)(7) or section 2523(f)

transfer may rely on any reasonable interpretation of the statutory

provisions. For these purposes, the provisions of Sec. 25.2519-1 (as

well as project LR-211-76, 1984-1 C.B., page 598, see

Sec. 601.601(d)(2)(ii)(b) of this chapter), are considered a reasonable

interpretation of the statutory provisions.

Par. 28. Section 25.2522(c)-4 is added to read as follows:

Sec. 25.2522(c)-4 Disallowance of double deduction in the case of

qualified terminable interest property.

No deduction is allowed under section 2522 for the transfer of an

interest in property if a deduction is taken from the total amount of

gifts with respect to that property by reason of section 2523(f). See

Sec. 25.2523(h)-1.

Par. 29. Section 25.2523(a)-1 is amended as follows:

a. Paragraph (a) is revised.

b. Paragraph (b)(3)(ii) is revised.

c. Paragraphs (c) and (d) are redesignated as paragraphs (d) and

(e), respectively.

d. New paragraph (c) is added.

e. Newly designated paragraph (d) is amended by:

1. Revising the paragraph heading.

2. Revising the introductory text.

3. The designations ``(1)'', ``(2)'', ``(3)'', ``(4)'', ``(5)'',

``(6)'', ``(7)'' appearing before each example are revised to read

``1.'', ``2.'', ``3.'', ``4.'', ``5.'', ``6.'', ``7.''.

4. Example 8 is added.

f. Newly designated paragraph (e) is amended by revising the first

sentence.

g. The revisions and additions read as follows:

Sec. 25.2523(a)-1 Gift to spouse; in general.

(a) In general. In determining the amount of taxable gifts for the

calendar quarter (with respect to gifts made after December 31, 1970,

and before January 1, 1982), or calendar year (with respect to gifts

made before January 1, 1971, or after December 31, 1981), a donor may

deduct the value of any property interest transferred by gift to a

donee who at the time of the gift is the donor's spouse, except as

limited by paragraphs (b) and (c) of this section. See Sec. 25.2502-

l(c)(1) for the definition of calendar quarter. This deduction is

referred to as the marital deduction. In the case of gifts made prior

to July 14, 1988, no marital deduction is allowed with respect to a

gift if, at the time of the gift, the donor is a nonresident not a

citizen of the United States. Further, in the case of gifts made on or

after July 14, 1988, no marital deduction is allowed (regardless of the

donor's citizenship or residence) for transfers to a spouse who is not

a citizen of the United States at the time of the transfer. However,

for certain special rules applicable in the case of estate and gift tax

treaties, see section 7815(d)(14) of Public Law 101-239. The donor must

submit any evidence necessary to establish the donor's right to the

marital deduction.

(b) * * *

(3) * * *

(ii) Any property interest transferred by a donor to the donor's

spouse is a nondeductible interest to the extent it is not required to

be included in a gift tax return for a calendar quarter (for gifts made

after December 31, 1970, and before January 1, 1982) or calendar year

(for gifts made before January 1, 1971, or after December 31, 1981).

deduction depends upon when the interspousal gifts are made, whether

the gifts are terminable interests, whether the limitations of

Sec. 25.2523(f)-1A (relating to gifts of community property before

January 1, 1982) are applicable, and whether Sec. 25.2523(f)-1

(relating to the election with respect to life estates) is applicable,

and (with respect to gifts made on or after July 14, 1988) whether the

donee spouse is a citizen of the United States (see section 2523(i)).

(2) Gifts prior to January 1, 1977. Generally, with respect to

gifts made during a calendar quarter prior to January 1, 1977, the

marital deduction allowable under section 2523 is 50 percent of the

aggregate value of the deductible interests. See section 2524 for an

additional limitation on the amount of the allowable deduction.

(3) Gifts after December 31, 1976, and before January 1, 1982.

Generally, with respect to gifts made during a calendar quarter

beginning after December 31, 1976, and ending prior to January 1, 1982,

the marital deduction allowable under section 2523 is computed as a

percentage of the deductible interests in those gifts. If the aggregate

amount of deductions for such gifts is $100,000 or less, a deduction is

allowed for 100 percent of the deductible interests. No deduction is

allowed for otherwise deductible interests in an aggregate amount that

exceeds $100,000 and is equal to or less than $200,000. For deductible

interests in excess of $200,000, the deduction is limited to 50 percent

of such deductible interests. If a donor remarries, the computations in

this paragraph (c)(3) are made on the basis of aggregate gifts to all

persons who at the time of the gifts are the donor's spouse. See

section 2524 for an additional limitation on the amount of the

allowable deduction.

(4) Gifts after December 31, 1981. Generally, with respect to gifts

made during a calendar year beginning after December 31, 1981 (other

than gifts made on or after July 14, 1988, to a spouse who is not a

United States citizen on the date of the transfer), the marital

deduction allowable under section 2523 is 100 percent of the aggregate

value of the deductible interests. See section 2524 for an additional

limitation on the amount of the allowable deduction, and section

2523(i) regarding disallowance of the marital deduction for gifts to a

spouse who is not a United States citizen.

(d) Examples. The following examples (in which it is assumed that

the donors have previously utilized any specific exemptions provided by

section 2521 for gifts prior to January 1, 1977) illustrate the

application of paragraph (c) of this section and the interrelationship

of sections 2523 and 2503.

* * * * *

Example 8. A donor made a transfer by gift to the donor's

spouse, a United States citizen, of $200,000 cash on January 1,

1995. The donor made no other transfers during 1995. For calendar

year 1995, the amount excluded under section 2503(b) is $10,000; the

marital deduction is $190,000; and the amount of taxable gifts is

zero ($200,000--$10,000 (annual exclusion)--$190,000 (marital

deduction)).

(e) Valuation. If the income from property is made payable to the

donor or another individual for life or for a term of years, with

remainder to the donor's spouse or to the estate of the donor's spouse,

the marital deduction is computed (pursuant to Sec. 25.2523(a)-1(c))

with respect to the present value of the remainder, determined under

section 7520. * * *

Par. 30. Section 25.2523(b)-1 is amended as follows:

a. Paragraph (a)(1) is revised.

b. In paragraph (b)(3), the first sentence is amended by removing

the reference ``Sec. 25.2523(e)-1'' and adding ``Sec. 25.2523(e)-l or

25.2523(f)-l'' in its place.

c. In paragraph (b)(3), the designations ``(1)'' and ``(2)''

appearing before each example are revised to read ``1.'' and ``2.''

d. In paragraph (b)(3), the phrase immediately preceding Example 1

is revised.

e. In paragraph (b)(6), the designations ``(1)'', ``(2)'', ``(3)'',

``(4)'', ``(5)'', ``(6)'' appearing before each example are revised to

read ``l.'', ``2.'', ``3.'', ``4.'', ``5.'', ``6.''.

f. In paragraph (b)(6), the phrase immediately preceding Example 1

is revised.

g. In paragraph (c)(2), the phrase immediately preceding the

example is removed and a sentence is added in its place.

h. The additions and revisions read as follows:

Sec. 25.2523(b)-1 Life estate or other terminable interest.

(a) In general. (1) The provisions of section 2523(b) generally

disallow a marital deduction with respect to certain property interests

(referred to generally as terminable interests and defined in paragraph

(a)(3) of this section) transferred to the donee spouse under the

circumstances described in paragraph (a)(2) of this section, unless the

transfer comes within the purview of one of the exceptions set forth in

Sec. 25.2523(d)-1 (relating to certain joint interests);

Sec. 25.2523(e)-1 (relating to certain life estates with powers of

appointment); Sec. 25.2523(f)-1 (relating to certain qualified

terminable interest property); or Sec. 25.2523(g)-1 (relating to

certain qualified charitable remainder trusts).

* * * * *

(b) * * *

(3) * * * The following examples, in which it is assumed that the

donor did not make an election under sections 2523(f)(2)(C) and (f)(4),

illustrate the application of the provisions of this paragraph (b)(3):

* * * * *

(6) * * * In each example, it is assumed that the donor made no

election under sections 2523(f)(2)(C) and (f)(4) and that the property

interest that the donor transferred to a person other than the donee

spouse is not transferred for adequate and full consideration in money

or money's worth: * * *

(2) * * * The application of this paragraph may be further

illustrated by the following example, in which it is assumed that the

donor made no election under sections 2523(f)(2)(C) and (f)(4).

* * * * *

Par. 31. Sec. 25.2523(c)-1 is amended by removing the first

sentence of paragraph (c) and adding three new sentences in its place

to read as follows:

Sec. 25.2523(c)-1 Interest in unidentified assets.

* * * * *

section exist, only a portion of the property interest passing to the

spouse is a deductible interest. The portion qualifying as a deductible

interest is an amount equal to the excess, if any, of the value of the

property interest passing to the spouse over the aggregate value of the

asset (or assets) that if transferred to the spouse would not qualify

for the marital deduction. See paragraph (c) of Sec. 25.2523(a)-l to

determine the percentage of the deductible interest allowable as a

marital deduction. * * *

* * * * *

Par. 32. The third sentence of Sec. 25.2523(d)-1 is revised to read

as follows:

Sec. 25.2523(d)-1 Joint interests.

* * * Thus, if the donor purchased real property in the name of the

donor and the donor's spouse as tenants by the entirety or as joint

tenants with rights of survivorship, a marital deduction is allowable

with respect to the value of the interest of the donee pouse in the

property (subject to the limitations set forth in Sec. 25.2523(a)-1). *

* *

Par. 33. Section 25.2523(e)-1, paragraph (c) is revised to read as

follows:

Sec. 25.2523(e)-1 Marital deduction; life estate with power of

appointment in donee spouse.

* * * * *

in paragraphs (c)(2) and (c)(3) of this section, a partial interest in

property is not treated as a specific portion of the entire interest.

In addition, any specific portion of an entire interest in property is

nondeductible to the extent the specific portion is subject to invasion

for the benefit of any person other than the donee spouse, except in

the case of a deduction allowable under section 2523(e), relating to

the exercise of a general power of appointment by the donee spouse.

(2) Fraction or percentage share. Under section 2523(e), a partial

interest in property is treated as a specific portion of the entire

interest if the rights of the donee spouse in income, and the required

rights as to the power described in Sec. 25.2523(e)-1(a), constitute a

fractional or percentage share of the entire property interest, so that

the donee spouse's interest reflects its proportionate share of the

increase or decrease in the value of the entire property interest to

which the income rights and the power relate. Thus, if the spouse's

right to income and the spouse's power extend to a specified fraction

or percentage of the property, or its equivalent, the interest is in a

specific portion of the property. In accordance with paragraph (b) of

this section, if the spouse has the right to receive the income from a

specific portion of the trust property (after applying paragraph (c)(3)

of this section) but has a power of appointment over a different

specific portion of the property (after applying paragraph (c)(3) of

this section), the marital deduction is limited to the lesser specific

portion.

(3) Special rule in the case of gifts made on or before October 24,

1992. In the case of gifts within the purview of the effective date

rule contained in paragraph (c)(3)(iii) of this section:

(i) A specific sum payable annually, or at more frequent intervals,

out of the property and its income that is not limited by the income of

the property is treated as the right to receive the income from a

specific portion of the property. The specific portion, for purposes of

paragraph (c)(2) of this section, is the portion of the property that,

assuming the interest rate generally applicable for the valuation of

annuities at the time of the donor's gift, would produce income equal

to such payments. However, a pecuniary amount payable annually to a

donee spouse is not treated as a right to the income from a specific

portion of trust property for purposes of this paragraph (c)(3)(i) if

any person other than the donee spouse may receive, during the donee

spouse's lifetime, any distribution of the property. To determine the

applicable interest rate for valuing annuities, see sections 2512 and

7520 and the regulations under those sections.

(ii) The right to appoint a pecuniary amount out of a larger fund

(or trust corpus) is considered the right to appoint a specific portion

of such fund or trust in an amount equal to such pecuniary amount.

(iii) The rules contained in paragraphs (c)(3) (i) and (ii) of this

section apply with respect to gifts made on or before October 24, 1992.

(4) Local law. A partial interest in property is treated as a

specific portion of the entire interest if it is shown that the donee

spouse has rights under local law that are identical to those the donee

spouse would have acquired had the partial interest been expressed in

terms satisfying the requirements of paragraph (c)(2) of this section

(or paragraph (c)(3) of this section if applicable).

(5) Examples. The following examples illustrate the application of

paragraphs (b) and (c) of this section, where D, the donor, transfers

property to D's spouse, S:

Example 1. Spouse entitled to the lesser of an annuity or a

fraction of trust income. Prior to October 24, 1992, D transferred

in trust 500 identical shares of X Company stock, valued for gift

tax purposes at $500,000. The trust provided that during the

lifetime of D's spouse, S, the trustee is to pay annually to S the

lesser of one-half of the trust income or $20,000. Any trust income

not paid to S is to be accumulated in the trust and may not be

distributed during S's lifetime. S has a testamentary general power

of appointment over the entire trust principal. The applicable

interest rate for valuing annuities as of the date of D's gift under

section 7520 is 10 percent. For purposes of paragraphs (a) through

from the lesser of one-half of the stock ($250,000), or $200,000,

the specific portion of the stock which, as determined in accordance

with Sec. 25.2523(e)-1(c)(3)(i) of this chapter, would produce

annual income of $20,000 (20,000/.10). Accordingly, the marital

deduction is limited to $200,000 (200,000/500,000 or \2/5\ of the

value of the trust.)

Example 2. Spouse possesses power and income interest over

different specific portions of trust. The facts are the same as in

Example 1 except that S's testamentary general power of appointment

is exercisable over only \1/4\ of the trust principal. Consequently,

under section 2523(e), the marital deduction is allowable only for

the value of \1/4\ of the trust ($125,000); i.e., the lesser of the

value of the portion with respect to which S is deemed to be

entitled to all of the income (\2/5\ of the trust or $200,000), or

the value of the portion with respect to which S possesses the

requisite power of appointment (\1/4\ of the trust or $125,000).

Example 3. Power of appointment over shares of stock constitutes

a power over a specific portion. D transferred 250 identical shares

of Y company stock to a trust under the terms of which trust income

is to be paid annually to S, during S's lifetime. S was given a

testamentary general power of appointment over 100 shares of stock.

The trust provides that if the trustee sells the Y company stock,

S's general power of appointment is exercisable with respect to the

sale proceeds or the property in which the proceeds are reinvested.

Because the amount of property represented by a single share of

stock would be altered if the corporation split its stock, issued

stock dividends, made a distribution of capital, etc., a power to

appoint 100 shares at the time of S's death is not necessarily a

power to appoint the entire interest that the 100 shares represented

on the date of D's gift. If it is shown that, under local law, S has

a general power to appoint not only the 100 shares designated by D

but also 100/250 of any distributions by the corporation that are

included in trust principal, the requirements of paragraph (c)(2) of

this section are satisfied and S is treated as having a general

power to appoint 100/250 of the entire interest in the 250 shares.

In that case, the marital deduction is limited to 40 percent of the

trust principal. If local law does not give S that power, the 100

shares would not constitute a specific portion under

Sec. 25.2523(e)-1(c) (including Sec. 25.2523(e)-1(c)(3)(ii)). The

nature of the asset is such that a change in the capitalization of

the corporation could cause an alteration in the original value

represented by the shares at the time of the transfer and is thus

not a specific portion of the trust.

* * * * *

Par. 34. An undesignated center heading is added immediately

following Sec. 25.2524-1 to read as follows: ``Deductions Prior to

1982''

Par. 35. Section 25.2523(f)-1 is redesignated as Sec. 25.2523(f)-1A

under the new undesignated center heading ``Deductions Prior to 1982''

and amended as follows:

(a) The section heading of newly designated Sec. 25.2523(f)-1A is

revised.

(b) The first sentence of paragraph (a) is revised.

Sec. 25.2523(f)-1 A Special rule applicable to community property

transferred prior to January 1, 1982.

(a) In general. With respect to gifts made prior to January 1,

1982, the marital deduction is allowable with respect to any transfer

by a donor to the donor's spouse only to the extent that the transfer

is shown to represent a gift of property that was not, at the time of

the gift, held as community property, as defined in paragraph (b) of

this section. * * *

* * * * *

Par. 36. New Secs. 25.2523(f)-1, 25.2523(g)-1, 25.2523(h)-1 and

25.2523(h)-2 are added to read as follows:

Sec. 25.2523(f)-1 Election with respect to life estate transferred to

donee spouse.

(a) In general. (1) With respect to gifts made after December 31,

1981, subject to section 2523(i), a marital deduction is allowed under

section 2523(a) for transfers of qualified terminable interest

property. Qualified terminable interest property is terminable interest

property described in section 2523(b)(1) that satisfies the

requirements of section 2523(f)(2) and this section. Terminable

interests that are described in section 2523(b)(2) cannot qualify as

qualified terminable interest property. Thus, if the donor retains a

power described in section 2523(b)(2) to appoint an interest in

qualified terminable interest property, no deduction is allowable under

section 2523(a) for the property.

(2) All of the property for which a deduction is allowed under this

paragraph (a) is treated as passing to the donee spouse (for purposes

of Sec. 25.2523(a)-1), and no part of the property is treated as

retained by the donor or as passing to any person other than the donee

spouse (for purposes of Sec. 25.2523(b)-1(b)).

(b) Qualified terminable interest property--(1) Definition. Section

2523(f)(2) provides the definition of qualified terminable interest

property.

(2) Meaning of property. For purposes of section 2523(f)(2), the

term property generally means an entire interest in property (within

the meaning of Sec. 25.2523(e)-l(d)) or a specific portion of the

entire interest (within the meaning of Sec. 25.2523(e)-l(c)).

(3) Property for which the election may be made--(i) In general.

The election may relate to all or any part of property that meets the

requirements of section 2523(f)(2) (A) and (B), provided that any

partial election must be made with respect to a fractional or

percentage share of the property so that the elective portion reflects

its proportionate share of the increase or decrease in the entire

property for purposes of applying sections 2044 or 2519. Thus, if the

interest of the donee spouse in a trust (or other property in which the

spouse has a qualifying income interest) meets the requirements of this

section, the election may be made under section 2523(f)(2)(C) with

respect to a part of the trust (or other property) only if the election

relates to a defined fraction or percentage of the entire trust (or

other property) or specific portion thereof within the meaning of

Sec. 25.2523(e)-1(c). The fraction or percentage may be defined by

formula.

(ii) Division of trusts. If the interest of the donee spouse in a

trust meets the requirements of this section, the trust may be divided

into separate trusts to reflect a partial election that has been made,

if authorized under the terms of the governing instrument or otherwise

permissible under local law. A trust may be divided only if the

fiduciary is required, either by applicable local law or by the express

or implied provisions of the governing instrument, to divide the trust

according to the fair market value of the assets of the trust at the

time of the division. The division of the trusts must be done on a

fractional or percentage basis to reflect the partial election.

However, the separate trusts do not have to be funded with a pro rata

portion of each asset held by the undivided trust.

(4) Manner and time of making election. (i) An election under

section 2523(f)(2)(C) (other than a deemed election with respect to a

joint and survivor annuity as described in section 2523(f)(6)), is made

on a gift tax return for the calendar year in which the interest is

transferred. The return must be filed within the time prescribed by

section 6075(b) (determined without regard to section 6019(a)(2)),

including any extensions authorized under section 6075(b)(2) (relating

to an automatic extension of time for filing a gift tax return where

the donor is granted an extension of time to file the income tax

return).

(ii) If the election is made on a return for the calendar year that

includes the date of death of the donor, the return (as prescribed by

section 6075(b)(3)) must be filed no later than the time (including

extensions) for filing the estate tax return. The election, once made,

is irrevocable.

purposes of this section, the term qualifying income interest for life

is defined as provided in section 2056(b)(7)(B)(ii) and

Sec. 20.2056(b)-7(d)(1).

(i) Entitled for life to all the income. The principles outlined in

Sec. 25.2523(e)-1(f) (relating to whether the spouse is entitled for

life to all of the income from the entire interest or a specific

portion of the entire interest) apply in determining whether the donee

spouse is entitled for life to all the income from the property,

regardless of whether the interest passing to the donee spouse is in

trust. An income interest granted for a term of years, or a life estate

subject to termination upon the occurrence of a specified event (e.g.,

divorce) is not a qualifying income interest for life.

(ii) Income between last distribution date and date of spouse's

death. An income interest does not fail to constitute a qualifying

income interest for life solely because income for the period between

the last distribution date and the date of the donee spouse's death is

not required to be distributed to the estate of the donee spouse. See

Sec. 20.2044-1 of this chapter relating to the inclusion of such

undistributed income in the gross estate of the donee spouse.

(iii) Pooled income funds. An income interest in a pooled income

fund described in section 642(c)(5) constitutes a qualifying income

interest for life for purposes of this section.

(iv) Distribution of principal for the benefit of the donee spouse.

An income interest does not fail to constitute a qualifying income

interest for life solely because the trustee has a power to distribute

principal to or for the benefit of the donee spouse. The fact that

property distributed to a donee spouse may be transferred by the spouse

to another person does not result in a failure to satisfy the

requirement of section 2056(b)(7)(B)(ii)(II). However, if the governing

instrument requires the donee spouse to transfer the distributed

property to another person without full and adequate consideration in

money or money's worth, the requirement of section

2056(b)(7)(B)(ii)(II) is not satisfied.

(2) Immediate right to income. In order to constitute a qualifying

income interest for life, the donee spouse must be granted the

immediate right to receive the income from the property. Thus, an

income interest does not constitute a qualifying income interest for

life if the donee spouse receives the right to trust income commencing

at some time in the future, e.g., on the termination of a preceding

life income interest of the donor spouse.

(3) Annuities payable from trusts in the case of gifts made on or

before October 24, 1992. (i) In the case of gifts made on or before

October 24, 1992, a donee spouse's lifetime annuity interest payable

from a trust or other group of assets passing from the donor is treated

as a qualifying income interest for life for purposes of section

2523(f)(2)(B). The deductible interest, for purposes of

Sec. 25.2523(a)-1(b), is the specific portion of the property that,

assuming the applicable interest rate for valuing annuities at the time

the annuity interest is transferred, would produce income equal to the

minimum amount payable annually to the donee spouse. If, based on the

applicable interest rate, the entire property from which the annuity

may be satisfied is insufficient to produce income equal to the minimum

annual payment, the value of the deductible interest is the entire

value of the property. The value of the deductible interest may not

exceed the value of the property from which the annuity is payable. If

the annual payment may increase, the increased amount is not taken into

account in valuing the deductible interest.

(ii) An annuity interest is not treated as a qualifying income

interest for life for purposes of section 2523(f)(2)(B) if any person

other than the donee spouse may receive during the donee spouse's

lifetime, any distribution of the property or its income from which the

annuity is payable.

(iii) To determine the applicable interest rate for valuing

annuities, see sections 2512 and 7520 and the regulations under those

sections.

(4) Joint and survivor annuities. [Reserved]

(d) Treatment of interest retained by the donor spouse--(1) In

general. Under section 2523(f)(5)(A), if a donor spouse retains an

interest in qualified terminable interest property, any subsequent

transfer by the donor spouse of the retained interest in the property

is not treated as a transfer for gift tax purposes. Further, the

retention of the interest until the donor spouse's death does not cause

the property subject to the retained interest to be includable in the

gross estate of the donor spouse.

(2) Exception. Under section 2523(f)(5)(B), the rule contained in

paragraph (d)(1) of this section does not apply to any property after

the donee spouse is treated as having transferred the property under

section 2519, or after the property is includable in the gross estate

of the donee spouse under section 2044.

(e) Application of local law. The provisions of local law are taken

into account in determining whether or not the conditions of section

2523(f)(2) (A) and (B), and the conditions of paragraph (c) of this

section, are satisfied. For example, silence of a trust instrument on

the frequency of payment is not regarded as a failure to satisfy the

requirement that the income must be payable to the donee spouse

annually or more frequently unless applicable local law permits

payments less frequently to the donee spouse.

(f) Examples. The following examples illustrate the application of

this section, where D, the donor, transfers property to D's spouse, S.

Unless stated otherwise, it is assumed that S is not the trustee of any

trust established for S's benefit:

Example 1. Life estate in residence. D transfers by gift a

personal residence valued at $250,000 on the date of the gift to S

and D's children, giving S the exclusive and unrestricted right to

use the property (including the right to continue to occupy the

property as a personal residence or rent the property and receive

the income for her lifetime). After S's death, the property is to

pass to D's children. Under applicable local law, S's consent is

required for any sale of the property. If D elects to treat all of

the transferred property as qualified terminable interest property,

the deductible interest is $250,000, the value of the property for

gift tax purposes.

Example 2. Power to make property productive. D transfers assets

having a fair market value of $500,000 to a trust pursuant to which

S is given the right exercisable annually to require distribution of

all the trust income to S. No trust property may be distributed

during S's lifetime to any person other than S. The assets used to

fund the trust include both income producing assets and

nonproductive assets. Applicable local law permits S to require that

the trustee either make the trust property productive or sell the

property and reinvest the proceeds in productive property within a

reasonable time after the transfer. If D elects to treat the entire

trust as qualified terminable interest property, the deductible

interest is $500,000. If D elects to treat only 20 percent of the

trust as qualified terminable interest property, the deductible

interest is $100,000; i.e., 20 percent of $500,000.

Example 3. Power of distribution over fraction of trust income.

The facts are the same as in Example 2 except that S is given the

power exercisable annually to require distribution to S of only 50

percent of the trust income for life. The remaining trust income may

be accumulated or distributed among D's children and S in the

trustee's discretion. The maximum amount that D may elect to treat

as qualified terminable interest property is $250,000; i.e., the

value of the trust for gift tax purposes ($500,000) multiplied by

the percentage of the trust in which S has a qualifying income

interest for life (50 percent). If D elects to treat only 20 percent

of the portion of the trust in which S has a qualifying income

interest as qualified terminable interest property, the deductible

interest is $50,000; i.e, 20 percent of $250,000.

Example 4. Power to distribute trust corpus to other

beneficiaries. D transfers $500,000 to a trust providing that all

the trust income is to be paid to D's spouse, S, during S's

lifetime. The trustee is given the power to use annually $5,000 from

the trust for the maintenance and support of S's minor child, C. Any

such distribution does not necessarily relieve S of S's obligation

to support and maintain C. S does not have a qualifying income

interest for life in any portion of the trust because the gift fails

to satisfy the condition in sections 2523(f)(3) and

2056(b)(7)(B)(ii)(II) that no person have a power, other than a

power the exercise of which takes effect only at or after S's death,

to appoint any part of the property to any person other than S. The

trust would also be nondeductible under section 2523(f) if S, rather

than the trustee, were given the power to appoint a portion of the

principal to C. However, in the latter case, if S made a qualified

disclaimer (within the meaning of section 2518) of the power to

appoint to C, the trust could qualify for the marital deduction

pursuant to section 2523(f), assuming that the power was personal to

S and S's disclaimer terminates the power. Similarly, if C made a

qualified disclaimer of the right to receive distributions from the

trust, the trust would qualify under section 2523(f) assuming that

C's disclaimer effectively negates the trustee's power under local

law.

Example 5. Spouse's interest terminable on divorce. The facts

are the same as in Example 3 except that if S and D divorce, S's

interest in the trust will pass to C. S's income interest is not a

qualifying income interest for life because it is terminable upon

S's divorce. Therefore, no portion of the trust is deductible under

section 2523(f).

Example 6. Spouse's interest in trust in the form of an annuity.

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