Requirements to Ensure Collection of Section 2056A Estate Tax

DEPARTMENT OF THE TREASURY

26 CFR Part 20 and 602

[TD 8613]

RIN 1545-AS67

Requirements to Ensure Collection of Section 2056A Estate Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations that provide

guidance relating to the additional requirements necessary to ensure

the collection of the estate tax imposed under section 2056A(b) with

respect to taxable events involving qualified domestic trusts (QDOTs)

described in section 2056A(a). The text of these temporary regulations

also serves as the text of the proposed regulations set forth in the

notice of proposed rulemaking on this subject in the Proposed Rules

section of this issue of the Federal Register.

DATES: These regulations are effective August 22, 1995.

These regulations apply to estates of decedents dying after March

7, 1996.

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

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

These regulations are being issued without prior notice and public

procedure pursuant to the Administrative Procedure Act (5 U.S.C. 553).

For this reason, the collections of information contained in these

regulations have been reviewed and, pending receipt and evaluation of

public comments, approved by the Office of Management and Budget under

control number 1545-1443.

[[Page 43555]]

For further information concerning this collection of information,

and where to submit comments on the collections of information and the

accuracy of the estimated burden, and suggestions for reducing this

burden, please refer to the preamble to the cross-referencing notice of

proposed rulemaking published in the Proposed Rules section of this

issue of the Federal Register.

Background

This document contains amendments to the Estate Tax Regulations (26

CFR part 20) under section 2056A of the Internal Revenue Code of 1986

(Code). Section 2056A was added by section 5033 of the Technical and

Miscellaneous Revenue Act of 1988. These temporary regulations provide

additional requirements that must be satisfied in order for a trust to

qualify as a QDOT. The requirements are necessary to ensure the

collection of the section 2056A estate tax that is imposed upon any

distribution of principal from the QDOT, upon the death of the

surviving spouse, or if the trust ceases to qualify as a QDOT.

Explanation of Provisions

Section 2056A(a)(2) authorizes the Secretary to promulgate

regulations that will ensure the collection of the estate tax imposed

under section 2056A(b). In accordance with this grant of regulatory

authority, a notice of proposed rulemaking was published in the Federal

Register (58 FR 305), on January 5, 1993. The Service received written

comments on the proposed regulations and, on April 2, 1993, held a

public hearing on the regulations. After consideration of all written

and oral comments received, it was determined to issue these

regulations as temporary and proposed regulations in order to obtain

additional public comment with respect to the additional requirements

necessary to ensure collection of the section 2056A estate tax in view

of the significant number of changes made from the text of the proposed

regulations. The remainder of the proposed regulations under section

2056A have been adopted as final regulations in TD 8612.

Under Sec. 20.2056A-2(d)(1) of the proposed regulations, if the

fair market value of the assets of the QDOT at the death of the

decedent exceeds $2 million, the trust instrument must require that:

(1) At least one trustee be a bank as defined in section 581 or (2) the

trustee furnish a bond or security to the IRS in an amount equal to 65

percent of the fair market value of the trust corpus, determined as of

the date of the decedent's death. The proposed regulations further

provide that if the fair market value of the QDOT assets at the date of

the decedent's death is $2 million or less, the QDOT need not meet the

``bank'' or ``bond'' requirement if, as an alternative, the trust

instrument expressly provides that no more than 35 percent of the fair

market value of the trust assets, determined annually, may be invested

in real property that is not located in the United States.

Numerous comments were received regarding these additional

regulatory requirements for qualification as a QDOT. Several

commentators suggested that requiring the estate to post a bond or

appoint a bank as trustee in all cases where trust assets exceed $2

million imposed a burden on these trusts that was expensive and

unnecessary. These commentators indicated that the Service's interest

in ensuring collection of the section 2056A estate tax would be

adequately protected, regardless of the value of the QDOT assets, if

either a bank is acting as a trustee, the estate posts a bond, or the

trust instrument prohibits investment in foreign real property in

excess of the permissible limits. Thus, in the view of these

commentators, a trust consisting entirely of liquid assets, regardless

of value, would require no special security mechanisms to ensure

collection of the section 2056A estate tax (inasmuch as the QDOT would

not own any foreign real property). These recommendations have not been

adopted.

The temporary regulations generally retain the framework contained

in the proposed regulations. The legislative history underlying the

enactment of section 2056A expresses Congress' concerns regarding the

ability to collect the section 2056A estate tax and contains a clear

directive to require appropriate security mechanisms to ensure

collection. H.R. Rep. No. 795, 100th Cong. 2d Sess. 592 (July 26,

1988). Thus, the provisions in the proposed regulations requiring a

surety arrangement or a bank trustee if the trust is sufficiently

large, or contains significant foreign real property, have been

retained, because it is believed that these requirements best

effectuate the Congressional mandate. With respect to such QDOTs,

collection of the section 2056A estate tax can not be adequately

assured in the absence of special security measures. Further, it is

believed that the $2 million threshold for imposing additional security

requirements equitably balances the interests of the Government with

the financial constraints of smaller QDOTs.

However, many revisions have been made in the temporary regulations

that are intended to provide flexibility and guidance and to alleviate

any undue burden attributable to the special security requirements.

In response to comments that the bank trustee provision contained

in Sec. 20.2056A-2(d)(1)(i)(A) of the proposed regulations (requiring a

bank described in section 581 to act as the U.S. Trustee) discriminates

against foreign banks, the temporary regulations provide that a United

States branch of a foreign bank may satisfy the bank trustee

requirement, provided that the trust instrument names at least one

United States Trustee to serve as co-trustee of the QDOT at all times

during the administration of the QDOT.

Another commentator suggested that an individual attorney be

authorized to act as the U.S. Trustee in lieu of a United States bank

in order to satisfy the ``bank trustee'' requirement. The comment

reflects a historical practice in certain localities of an attorney

serving as professional trustee of substantial trusts with the backing

of the financial resources of the attorney's law firm. This alternative

proposal is not incorporated in the temporary regulations. Under the

procedures provided in Sec. 20.2056A-2T(d)(4), the IRS is considering

whether an arrangement may qualify as an alternate security arrangement

where an attorney (or firm) actively engaged in the administration of

estates and trusts acts as trustee and has individually, and with the

other members of the attorney's firm, sufficient assets under

management. During the period prior to the publication of guidance in

the Internal Revenue Bulletin regarding alternate plans or

arrangements, the IRS will accept letter ruling requests as to suitable

alternate arrangements.

Section 20.2056A-2(d)(2) of the proposed regulations provides that

if the U.S. Trustee is an individual United States citizen, the

individual must have a tax home, as defined in section 911(d)(3), in

the United States. Comments have been received suggesting that this

requirement should be deleted since many attorneys, executives, and

other individuals that would be willing to serve as the U.S. Trustee

are resident abroad in the conduct of their business. This change has

not been made. In order to assure collection of the section 2056A

estate tax, the U.S. Trustee must be subject to United States judicial

process at all times during the administration of the trust.

The sections of the proposed regulations discussing security

arrangements with respect to QDOTs in excess of $2 million have been

[[Page 43556]]

substantially modified in the temporary regulations. As noted above,

the proposed regulations provided for the posting of a bond as an

alternative to employing a bank as the QDOT U.S. Trustee. However, it

was recognized that in certain situations, because of statutory

restrictions and logistical concerns with monitoring cancellation of

the surety arrangement, other security arrangements might be more

desirable.

Accordingly, to address these concerns Sec. 20.2056A-2T(d)(1)(i)(C)

specifically authorizes letters of credit, in lieu of providing a bank

trustee or bond, as a permissible security arrangement. The letter of

credit may be issued by a bank described in section 581 or a U.S.

branch of a foreign bank. Alternatively, the letter of credit may be

issued by a foreign bank and confirmed by a bank described in section

581. Section 20.2056A-2T(d)(1)(i) (B) and (C) contain specific

guidelines outlining the terms of the bond and letter of credit

required, and provide a sample format for each. In general, the bond or

letter of credit must be for a term of at least one year and must be

automatically renewable at the expiration of the term, on an annual

basis thereafter, unless the IRS is notified at least 60 days prior to

the expiration of the term (including periods of automatic renewals)

that the security will not be renewed. The IRS will treat the notice of

failure to renew as a taxable event and draw on the instrument, unless

an alternative form of security is substituted.

Further, under the temporary regulations, if the bond or letter of

credit security arrangement is used, the QDOT must provide that if the

IRS draws on the bond or letter of credit, neither the U.S. Trustee nor

any other person will seek a return of the funds until after April 15th

of the following calendar year, the date the Form 706QDT reporting a

taxable event would ordinarily be due. This requirement is intended to

ensure that the IRS will be able to retain any funds drawn upon since,

after the due date of the return, the IRS would have the ability to

make a jeopardy assessment under section 6861, if appropriate. The IRS

is contemplating the development of internal procedures whereby the

taxpayer may request review of the IRS's decision to draw upon the bond

or letter of credit. In addition, prior to drawing on the bond or

letter of credit, the IRS will make every effort to contact the parties

to verify that the action is appropriate under the circumstances.

In addition, if the bond or letter of credit security arrangement

is employed, and if it is finally determined that the fair market value

of the QDOT assets is in excess of the value as originally reported on

the return, then the U.S. Trustee is accorded a reasonable period of

time to increase the bond or letter of credit to the requisite amount.

However, Sec. 20.2056A-2T(d)(1)(i)(D) provides that if the QDOT assets

are undervalued by 50 percent or more, the marital deduction will be

disallowed unless a good faith reasonable cause standard is satisfied.

This provision ensures that the QDOT will be adequately secured and

discourages egregious undervaluations of the QDOT assets. A similar

rule is provided in Sec. 20.2056A-2T(d)(1)(ii) with respect to the $2

million threshold for providing additional security arrangements.

Comments were received suggesting that, for purposes of determining

the $2 million threshold under Sec. 20.2056A-2(d)(1) of the proposed

regulations, the value of the surviving spouse's residence should be

excluded. It has also been suggested that the surviving spouse's

residence be excluded from both the bond and the foreign real property

requirements of the regulations. It is recognized that if a significant

portion of the trust value consists of the surviving spouse's principal

residence, an asset that will normally generate no income, the costs

associated with the posting of the bond, providing a letter of credit

or employing an institutional trustee to manage the trust's assets may

be burdensome. However, in cases involving any real property,

regardless of use, situated outside the United States, a significant

collection risk is presented in the absence of the additional security

measures required under the regulations.

Accordingly, Sec. 20.2056A-2T(d)(1)(iii) provides that the value

(measured at the decedent's death) attributable to the surviving

spouse's principal residence (within the meaning of section 1034)

wherever situated (and related furnishings), up to an aggregate value

of $600,000, may be excluded for purposes of determining if the $2

million threshold is exceeded. In addition, the temporary regulations

provide that the value of the principal residence (and related

furnishings), wherever situated, up to an aggregate value of $600,000,

may be excluded for purposes of determining the amount of the bond or

letter of credit (if required). However, the value of the principal

residence (and related furnishings) will continue to be included in

determining, with respect to QDOTs of less than $2 million, whether the

35 percent foreign real property threshold under Sec. 20.2056A-

2T(d)(1)(ii) has been exceeded.

Under Sec. 20.2056A-2T(d)(1)(iii), the term related furnishings

includes standard furniture and commonly included items such as

appliances, fixtures, decorative items, and china, that are not beyond

the value associated with normal household and decorative use. Rare

artwork, valuable antiques, and automobiles of any kind or class, are

not included within the meaning of this term. Further, the principal

residence exclusion ceases to apply if the property ceases to be used

as a principal residence, or the residence is sold and the ``adjusted

sales price'' (as defined in section 1034(b)(1)) is not reinvested

within twelve months thereafter in another principal residence. If the

principal residence exclusion applies, the U.S. Trustee must file an

annual statement as provided in Sec. 20.2056A-2T(d)(3). Upon cessation

of qualification for the exclusion, the U.S. Trustee must, within 120

days thereafter, bring the trust into full compliance with

Sec. 20.2056A-2T(d)(1) (i) or (ii), whichever is applicable (determined

as if the principal residence exclusion had not been applicable to the

estate).

Section 20.2056A-2T(d)(1)(ii) clarifies that the $2 million

threshold is determined without regard to any indebtedness with respect

to the assets comprising the QDOT. It is not necessary to know at the

time a QDOT agreement is executed whether the QDOT will exceed the $2

million threshold or whether the QDOT will be $2 million or less and

thus eligible to meet the 35 percent foreign real property requirement.

A QDOT agreement will satisfy the requirements of the temporary

regulations by stating the regulations' requirements in the alternative

and leaving the determination as to which requirements apply to the

particular QDOT to be determined at the date of death (or the alternate

valuation date, if applicable).

In response to comments, the look-through rule contained in

Sec. 20.2056A-2(d)(1)(ii)(B) of the proposed regulations has been

revised to apply only to trusts with less than $2 million in assets

that seek QDOT qualification by satisfying the 35 percent foreign real

property requirement, (as opposed to posting a bond or providing a

letter of credit, or utilizing a bank trustee). The look-through rule

will not apply if an alternative security arrangement is provided.

A comment was made that the look-through rule should only apply

when a QDOT that owns stock in a corporation with 15 or fewer

shareholders, or an interest in a partnership with 15 or fewer

partners, has a controlling interest

[[Page 43557]]

in the entity. This suggestion has not been adopted. The regulation

focuses on the number of shareholders or partners in the entity because

the fewer the number of shareholders or partners, the more likely that

the entity may be a family holding company created for the purpose of

avoiding the QDOT security rules. The control that the QDOT may be able

to exert over the entity is not the primary concern. However, a de

minimis rule is adopted to avoid application of the look-through rule

under certain circumstances. Accordingly, the temporary regulations

provide that the look-through rule only applies if the QDOT owns

(including interests that it is deemed to own) more than 20% of the

voting interest or value in the corporation or more than a 20% capital

interest in the partnership.

Comments were received that the anti-abuse rule contained in

Sec. 20.2056A-2(d)(1)(iii) of the proposed regulations was overly

broad. It has been determined that the breadth of the rule is necessary

to ensure collection of the tax and, therefore, the rule as proposed is

not modified.

Comments have been received recommending elimination of the rule

under Sec. 20.2056A-2(d)(3) of the proposed regulations, requiring that

personal property and written evidence of intangible personal property

must be physically located in the United States at all times during the

term of the QDOT. These comments noted that domestic brokerage

companies often provide for custody of foreign securities outside of

the United States to facilitate sale of the securities. This practice

would make it difficult, if not impossible, for QDOTs to comply with

the intangible personal property rule. In light of these comments, the

requirement that tangible and intangible personal property be located

in the United States has been deleted from the temporary regulations.

Section 20.2056A-2(d)(4) of the proposed regulations requires the

U.S. Trustee to file an annual statement with the IRS providing certain

information and summarizing the assets held by the QDOT and the fair

market value of each asset. Comments were received recommending that

the annual statement requirement should not apply if the bank or bond

requirement is satisfied. Additionally, the commentators recommended

that annual filing should be required only if the QDOT holds foreign

real property.

After fully considering these comments, it was determined that

modifications to the annual reporting requirement were warranted. Under

Sec. 20.2056A-2T(d)(3), the annual statement is required to be filed

only in cases where: (1) The QDOT directly (before application of the

look-through rule) owns foreign real property (unless the bank, bond,

or letter of credit security requirement is met); (2) the principal

residence exclusion applies, regardless of the situs of the residence

or whether the bank, bond, or letter of credit requirement is met; or

(3) after applying the look-through rule (as limited in application by

the temporary regulations), the QDOT is treated as owning any foreign

real property. Additional rules apply if the principal residence

exclusion ceases to apply or the residence is sold. In addition, the

temporary regulations have been modified to provide that the annual

statement is to be filed with the Form 706-QDT rather than with the

Form 1041 as provided in the proposed regulations. This change was

necessary because not all QDOTs are required to file Form 1041.

Comments have also been received recommending that the IRS provide

specific examples of acceptable alternate arrangements and situations

justifying a waiver under Sec. 20.2056A-2(d)(5) of the proposed

regulations. The IRS intends to provide guidance to be published in the

Internal Revenue Bulletin on this subject. As noted above, until such

guidance is published, the IRS will accept requests for letter rulings

on acceptable alternate arrangements.

In general, these regulations are effective with respect to estates

of decedents dying after the date that is 180 days after the date these

regulations are published in the Federal Register. In order for a trust

subject to these regulations to qualify as a QDOT, the trust must

contain the governing instrument requirements of Sec. 20.2056A-2T(d)(1)

(i) and (ii) at the time of death, or be reformed, pursuant to the

terms of the governing instrument, or judicially under section

2056(d)(5). However, in response to comments, special transitional

rules in the case of incompetency and in the case of certain

irrevocable trusts have been added pursuant to which a trust is deemed

to meet the governing instrument requirements of Sec. 20.2056A-2T(d)(1)

(i) and (ii) even though such requirements are not contained in the

governing instrument, providing certain requirements are met.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

these temporary regulations will be submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their

impact on small business.

Drafting Information

The principal author of these regulations is Susan Hurwitz, Office

of Assistant Chief Counsel (Passthroughs and Special Industries).

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects

26 CFR Part 20

Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

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

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

1954

Paragraph 1. The authority citation for part 20 continues to read

in part as follows:

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

Par. 2. Section 20.2056A-2T is added to read as follows:

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

(temporary).

(a) through (c) [Reserved] For further guidance see Sec. 20.2056A-2

(a) through (c).

(d) Additional requirements to ensure collection of the section

2056A estate tax--(1) Security and other arrangements for payment of

estate tax imposed under section 2056A(b)(1)--(i) QDOTs with assets in

excess of $2 million. If the fair market value of the assets passing,

treated, or deemed to have passed to the QDOT (or in the form of a

QDOT), determined without reduction for any indebtedness with respect

to the assets, as finally determined for federal estate tax purposes,

exceeds $2 million as of the date of the decedent's death or, if

applicable, the alternate valuation date

[[Page 43558]]

(adjusted as provided in paragraph (d)(1)(iii) of this section), the

trust instrument must meet the requirements of either paragraph

(d)(1)(i) (A), (B), or (C) of this section at all times during the term

of the QDOT. The QDOT may alternate between any of the arrangements

provided in paragraphs (d)(1)(i) (A), (B), and (C) of this section

provided that, at any given time, at least one of the arrangements is

in effect.

(A) Bank Trustee. Except as otherwise provided in paragraph (d)(6)

(ii) or (iii) of this section, the trust instrument must require that

during the entire term of the QDOT, at least one U.S. Trustee be a

bank, as defined in section 581. Alternatively, the trust instrument

must, except as otherwise provided in paragraph (d)(6) (ii) or (iii) of

this section, require that during the entire term of the QDOT, at least

one trustee be a United States branch of a foreign bank, provided that

the trust instrument must also require that, during the entire term of

the QDOT, a U.S. Trustee act as a trustee with such foreign bank

trustee.

(B) Bond. Except as otherwise provided in paragraph (d)(6)(ii) or

(iii) of this section, the trust instrument must require that the U.S.

Trustee furnish a bond in favor of the Internal Revenue Service in an

amount equal to 65 percent of the fair market value of the trust assets

(without regard to any indebtedness thereon) as of the date of the

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

finally determined for federal estate tax purposes (and as further

adjusted as provided in paragraph (d)(1)(iii) of this section). If,

after examination of the estate tax return, the fair market value of

the trust assets, as originally reported on the estate tax return, is

adjusted (pursuant to a judicial proceeding or otherwise) resulting in

a final determination of the value of the assets as reported on the

return, the U.S. Trustee shall have a reasonable period of time (not

exceeding sixty days after the conclusion of the proceeding or other

action resulting in a final determination of the value of the assets)

to adjust the amount of the bond accordingly. But see, paragraph

(d)(1)(i)(D) of this section for a special rule in the case of a

substantial undervaluation of QDOT assets. Unless an alternate

arrangement under paragraph (d)(1)(i) (A), (B), or (C) of this section,

or an arrangement prescribed under paragraph (d)(4) of this section, is

provided, or the trust is otherwise no longer subject to the

requirements of section 2056A pursuant to section 2056A(b)(12), the

bond must remain in effect until the termination of the trust and the

payment of any tax liability finally determined to be due under section

2056A(b).

(1) Requirements with respect to the bond. The bond must be with a

satisfactory surety, as prescribed under section 7101 and

Sec. 301.7101-1 of this chapter (Regulations on Procedure and

Administration), and shall be subject to Internal Revenue Service

review as may be prescribed by the Commissioner. The bond may not be

cancelled. The bond must be for a term of at least one year and must be

automatically renewable at the end of such term, on an annual basis

thereafter, unless notice of failure to renew is received by the IRS at

least 60 days prior to the end of the term, including periods of

automatic extensions. Any notice of failure to renew must be sent to

the Estate and Gift Tax Group in the District Office of the Internal

Revenue Service that has examination jurisdiction over the decedent's

estate (Internal Revenue Service, District Director, [specify location]

District Office, Estate and Gift Tax Examination Group, [specify Street

Address, City, State, Zip Code]) (or in the case of noncitizen

decedents and United States citizens who die domiciled outside the

United States, Estate and Gift Tax Examination Group, Assistant

Commissioner (International), CP:IN:D:C:EX:HQ:1114, Washington, DC

20024). The Service will not draw on the bond if, within 30 days of

receipt of the notice of failure to renew, the U.S. Trustee notifies

the Service (at the same address to which notice of failure to renew is

to be sent) that an alternate arrangement under paragraphs

(d)(1)(i)(A), (B), or (C) of this section has been secured and that

such arrangement will take effect immediately prior to or upon

expiration of the bond.

(2) Form of bond. The bond must be in the following form (or in a

form that is the same as the following form in all material respects),

or in such alternative form as the Commissioner may prescribe by

guidance published in the Internal Revenue Bulletin (see

Sec. 601.601(d)(2) of this chapter):

Bond in Favor of the Internal Revenue Service To Secure Payment

of Section 2056A Estate Tax Imposed Under Section 2056A(b) of the

Internal Revenue Code.

KNOW ALL PERSONS BY THESE PRESENTS, That the undersigned,

____________, the SURETY, and ____________, the PRINCIPAL, are

irrevocably held and firmly bound to pay the Internal Revenue

Service upon written demand that amount of any tax up to $[amount

determined under paragraph (d)(1)(i)(B) of this section], imposed

under section 2056A(b)(1) of the Internal Revenue Code (including

penalties and interest on said tax) determined by the Internal

Revenue Service to be payable with respect to the principal as

trustee for: [Identify trust and governing instrument, name and

address of trustee], a qualified domestic trust as defined in

section 2056A(a) of the Internal Revenue Code, for the payment of

which the said Principal and said Surety, bind themselves, their

heirs, executors, administrators, successors and assigns, jointly

and severally, firmly by these presents.

WHEREAS, The Internal Revenue Service may demand payment under

this bond at any time if the Internal Revenue Service in its sole

discretion determines that a taxable event with respect to the trust

has occurred; the trust no longer qualifies as a qualified domestic

trust as described in section 2056A(a) of the Internal Revenue Code

and the regulations promulgated thereunder, or a distribution

subject to the tax imposed under section 2056A(b)(1) has been made.

Demand by the Internal Revenue Service for payment may be made

whether or not the tax and tax return (Form 706-QDT) with respect to

the taxable event is due at the time of such demand, or an

assessment has been made by the Internal Revenue Service with

respect to such tax.

NOW THEREFORE, The condition of this obligation is such that it

shall not be cancelled and, if payment of all tax liability finally

determined to be imposed under section 2056A(b) is made, then this

obligation shall be null and void; otherwise, this obligation is to

remain in full force and effect for one year from its effective date

and is to be automatically renewable on an annual basis unless, at

least 60 days prior to the expiration date, including periods of

automatic renewals, the surety notifies the Internal Revenue Service

by Registered or Certified Mail, return receipt requested, of such

failure to renew. Receipt of such notice of failure to renew may be

considered a taxable event unless an alternate security arrangement

is obtained by the trustee prior to the date of expiration and the

Trustee notifies the Internal Revenue Service of such alternate

security arrangement. The surety shall remain liable for all taxable

events occurring prior to the date of expiration. All notices

required under this instrument should be sent to District Director,

[specify location] District Office, Estate and Gift Tax Examination

Group, Street Address, City, State, Zip Code. (In the case of

nonresident noncitizen decedents and United States citizens who die

domiciled outside the United States, all notices should be sent to

Estate and Gift Tax Examination Group, Assistant Commissioner

(International), CP:IN:D:C:EX:HQ:1114, Washington, DC 20024).

This bond shall be effective as of ____________.

Principal--------------------------------------------------------------

Date-------------------------------------------------------------------

Surety-----------------------------------------------------------------

Date-------------------------------------------------------------------

(3) Additional governing instrument requirements. The trust

instrument must also provide that in the event the Internal Revenue

Service draws on the bond, in accordance with its terms, neither the

U.S. Trustee nor any other

[[Page 43559]]

person will seek a return of any part of the remittance until April

15th of the calendar year following the year in which the bond is drawn

upon. After such date, any such remittance will be treated as a deposit

and will be returned (without interest) upon request of the U.S.

Trustee, unless it is determined that assessment or collection of the

tax imposed by section 2056A(b)(1) is in jeopardy, within the meaning

of section 6861. If an assessment under section 6861 is made, the

remittance will first be credited to any tax liability reported on the

Form 706-QDT, then to any unpaid balance of a section 2056A(b)(1)(A)

tax liability (plus interest and penalties) for any prior taxable

years, and any balance will then be returned to the U.S. Trustee.

(4) Procedure. The bond is to be filed with the decedent's federal

estate tax return, Form 706 or 706NA (unless an extension for filing

the bond is granted under Sec. 301.9100 of this chapter. The U.S.

Trustee must provide a written statement with the bond that provides a

list of the assets that will be used to fund the QDOT and the

respective values of such assets. The written statement must also

indicate whether any exclusions under paragraph (d)(1)(iii) of this

section are claimed.

(C) Letter of credit. Except as otherwise provided in paragraph

(d)(6)(ii) or (iii) of this section, the trust instrument must require

that the U.S. Trustee furnish an irrevocable letter of credit issued by

a bank, as defined in section 581, issued by a United States branch of

a foreign bank, or issued by a foreign bank and confirmed by a bank as

defined in section 581, in an amount equal to 65 percent of the fair

market value of the trust assets (without regard to any indebtedness

thereon) as of the date of the decedent's death (or alternate valuation

date, if applicable), as finally determined for federal estate tax

purposes (and as further adjusted as provided in paragraph (d)(1)(iii)

of this section). If, after examination of the estate tax return, the

fair market value of the trust assets, as originally reported on the

estate tax return, is adjusted (pursuant to a judicial proceeding or

otherwise) resulting in a final determination of the value of the

assets as reported on the return, the U.S. Trustee shall have a

reasonable period of time (not exceeding 60 days after the conclusion

of the proceeding or other action resulting in a final determination of

the value of the assets) to adjust the amount of the letter of credit

accordingly. But see, paragraph (d)(1)(i)(D) of this section for a

special rule in the case of a substantial undervaluation of QDOT

assets. Unless an alternate arrangement under paragraph (d)(1)(i) (A),

(B), or (C) of this section, or an arrangement prescribed under

paragraph (d)(4)of this section, is provided, or the trust is otherwise

no longer subject to the requirements of section 2056A pursuant to

section 2056A(b)(12), the letter of credit must remain in effect until

the termination of the trust and the payment of any tax liability

finally determined to be due under section 2056A(b).

(1) Requirements with respect to letter of credit. The letter of

credit shall be irrevocable and provide for sight payment. The letter

of credit must be for a term of at least one year and must be

automatically renewable at the end of such term, at least on an annual

basis, unless notice of failure to renew is received by the Internal

Revenue Service at least sixty days prior to the end of the term,

including periods of automatic renewals. If the letter of credit is

issued by the U.S. branch of a foreign bank and such U.S. branch is

closing, the branch (or foreign bank) must notify the Internal Revenue

Service of such closure and the notice of closure must be received at

least 60 days prior to the date of closure. Any notice of failure to

renew or closure of a U.S. branch of a foreign bank must be sent to the

Estate and Gift Tax Group in the District Office of the Internal

Revenue Service that has examination jurisdiction over the decedent's

estate (Internal Revenue Service, District Director, (specify location)

District Office, Estate and Gift Tax Examination Group, [Street

Address, City State, Zip Code]) (or in the case of noncitizen decedents

and United States citizens who die domiciled outside the United States,

Estate and Gift Tax Examination Group, Assistant Commissioner

(International), CP:IN:D:C:EX:HQ:1114, Washington, DC 20024). The

Internal Revenue Service will not draw on the letter of credit if,

within 30 days of receipt of the notice of failure to renew or closure

of the U.S. branch of a foreign bank, the U.S. Trustee notifies the

Service (at the same address to which notice is to be sent) that an

alternate arrangement under paragraph(d)(1)(i) (A), (B), or (C) of this

section has been secured and that such arrangement will take effect

immediately prior to or upon expiration of the letter of credit or

closure of the U.S. branch of the foreign bank.

(2) Form of letter of credit. The letter of credit shall be made in

the following form (or in a form that is the same as the following form

in all material respects), or such alternative form as the Commissioner

may prescribe by guidance published in the Internal Revenue Bulletin

(see Sec. 601.601(d)(2) of this chapter):

[Issue Date]

To: Internal Revenue Service

Attention: District Director, [specify location] District Office

Estate and Gift Tax Examination Group [Street Address, City, State,

ZIP Code]

[Or in the case of nonresident noncitizen decedents and United

States citizens who die domiciled outside the United States,

To: Estate and Gift Tax Examination Group, Assistant Commissioner

(International) CP:IN:D:C:EX:HQ:1114 Washington, DC 20024].

Dear Sirs: We hereby establish our irrevocable Letter of Credit

No. ________in your favor for drawings up to U.S. Sec. [Applicant

should provide bank with amount which Applicant determined under

paragraph (d)(1)(i)(C)] effective immediately. This Letter of Credit

is issued, presentable and payable at our office at

____________________ and expires at 3:00 p.m. [EDT, EST, CDT, CST,

MDT, MST, PDT, PST] on ____________ at said office.

For information and reference only, we are informed that this

Letter of Credit relates to [Applicant should provide bank with the

identity of qualified domestic trust and governing instrument], and

the name, address, and identifying number of the trustee is

[Applicant should provide bank with the trustee name, address and

the QDOT's TIN number, if any].

Drawings on this Letter of Credit are available upon

presentation of the following documents:

1. Your draft drawn at sight on us bearing our Letter of Credit

No. ________; and

2. Your signed statement as follows:

The amount of the accompanying draft is payable under [identify

bank] irrevocable Letter of Credit No. ________ pursuant to section

2056A of the Internal Revenue Code and the regulations promulgated

thereunder, because the Internal Revenue Service in its sole

discretion has determined that a ``taxable event'' with respect to

the trust has occurred; e.g., the trust no longer qualifies as a

qualified domestic trust as described in section 2056A of the

Internal Revenue Code and regulations promulgated thereunder, or a

distribution subject to the tax imposed under section 2056A(b)(1) of

the Internal Revenue Code has been made.

Except as expressly stated herein, this undertaking is not

subject to any agreement, requirement or qualification. The

obligation of [Name of Issuing Bank] under this Letter of Credit is

the individual obligation of [Name of Issuing Bank] and is in no way

contingent upon reimbursement with respect thereto.

It is a condition of this Letter of Credit that it is deemed to

be automatically extended without amendment for a period of one year

from the expiry date hereof, or any future expiration date, unless

at least 60 days prior to any expiration date, we send to you notice

by Registered Mail or Certified Mail, return receipt requested, or

by courier to your address indicated above, that we elect not to

consider this Letter of Credit renewed for any

[[Page 43560]]

such additional period. Upon receipt of such notice, you may draw

hereunder on or before the then current expiration date, by

presentation of your draft and statement as stipulated above.

In the case of a letter of credit issued by a U.S. branch of a

foreign bank the following language must be added]. It is a further

condition of this Letter of Credit that if the U.S. branch of [name

of foreign bank] is to be closed, that at least sixty days prior to

such closing, we send you notice by Registered Mail or Certified

Mail, return receipt requested, or by courier to your address

indicated above, that this branch will be closing. Such notice will

specify the actual date of closing. Upon receipt of such notice, you

may draw hereunder on or before the date of closure, by presentation

of your draft and statement as stipulated above.

Except where otherwise stated herein, this Letter of Credit is

subject to the Uniform Customs and Practice for Documentary Credits,

1993 Revision, ICC Publication No. 500. If we notify you of our

election not to consider this Letter of Credit renewed and the

expiration date occurs during an interruption of business described

in Article 17 of said Publication 500, unless you had consented to

cancellation prior to the expiration date, the bank hereby

specifically agrees to effect payment if this Letter of Credit is

drawn against within 30 days after the resumption of business.

Except as stated herein, this Letter of Credit cannot be

modified or revoked without your consent.

Authorized Signature---------------------------------------------------

Date-------------------------------------------------------------------

(3) Form of confirmation. If the requirements of this paragraph

(d)(1)(i)(C) are satisfied by the issuance of a letter of credit by a

foreign bank confirmed by a bank as defined in section 581, the

confirmation shall be made in the following form (or in a form that is

the same as the following form in all material respects), or such

alternative form as the Commissioner may prescribe by guidance

published in the Internal Revenue Bulletin:

[Issue Date]

To: Internal Revenue Service

Attention: District Director, [specify location] District

Office, Estate and Gift Tax Examination Group [State Address, City,

State, ZIP Code]

[or in the case of nonresident noncitizen decedents and United

States citizens who die domiciled outside the United States,

To: Estate and Gift Tax Examination Group, Assistant Commissioner

(International) CP:IN:D:C:EX:HQ:1114 Washington, DC 20024].

Dear Sirs: We hereby confirm the enclosed irrevocable Letter of

Credit No. ________, and amendments thereto, if any, in your favor

by ____________________ [Issuing Bank] for drawings up to U.S.

$________ [same amount as in initial Letter of Credit] effective

immediately. This confirmation is issued, presentable and payable at

our office at ____________ and expires at 3:00 p.m. [EDT, EST, CDT,

CST, MDT, MST, PDT, PST] on ____________ at said office.

For information and reference only, we are informed that this

Confirmation relates to [Applicant should provide bank with the

identity of qualified domestic trust and governing instrument], and

the name, address, and identifying number of the trustee is

[Applicant should provide bank with the trustee name, address and

the QDOT's TIN number, if any].

We hereby undertake to honor your sight draft(s) drawn as

specified in the Letter of Credit.

Except as expressly stated herein, this undertaking is not

subject to any agreement, condition or qualification. The obligation

of [Name of Confirming Bank] under this Confirmation is the

individual obligation of [Name of Confirming Bank] and is in no way

contingent upon reimbursement with respect thereto.

It is a condition of this Confirmation that it is deemed to be

automatically extended without amendment for a period of one year

from the expiry date hereof, or any future expiration date, unless

at least sixty days prior to any expiration date, we send to you

notice by Registered Mail or Certified Mail, return receipt

requested, or by courier to your address indicated above, that we

elect not to consider this Confirmation renewed for any such

additional period. Upon receipt of such notice, you may draw

hereunder on or before the then current expiration date, by

presentation of your draft and statement as stipulated above.

Except where otherwise stated herein, this Confirmation is

subject to the Uniform Customs and Practice for Documentary Credits,

1993 Revision, ICC Publication No. 500. If we notify you of our

election not to consider this Confirmation renewed and the

expiration date occurs during an interruption of business described

in Article 17 of said Publication 500, unless you had consented to

cancellation prior to the expiration date, the bank hereby

specifically agrees to effect payment if this Confirmation is drawn

against within 30 days after the resumption of business.

Except as stated herein, this Confirmation cannot be modified or

revoked without your consent.

Authorized Signature---------------------------------------------------

Date-------------------------------------------------------------------

(4) Additional governing instrument requirements. The trust

instrument must also provide that in the event that the Internal

Revenue Service draws on the letter of credit (or confirmation) in

accordance with its terms, neither the U.S. Trustee nor any other

person will seek a return of any part of the remittance until April

15th of the calendar year following the year in which the letter of

credit (or confirmation) is drawn upon. After such date, any such

remittance will be treated as a deposit and will be returned (without

interest) upon request of the U.S. Trustee after the date specified

above, unless it is determined that assessment or collection of the tax

imposed by section 2056A(b)(1) is in jeopardy, within the meaning of

section 6861. If an assessment under section 6861 is made, the

remittance will first be credited to any tax liability reported on the

Form 706-QDT, then to any unpaid balance of a section 2056A(b)(1)(A)

tax liability (plus interest and penalties) for any prior taxable

years, and any balance will then be returned to the U.S. Trustee.

(5) Procedure. The letter of credit (and confirmation, if

applicable) is to be filed with the decedent's federal estate tax

return, Form 706 or 706NA (unless an extension for filing the letter of

credit is granted under Sec. 301.9100 of this chapter). The U.S.

Trustee must provide a written statement with the letter of credit that

provides a list of the assets that will be used to fund the QDOT and

the respective values of such assets. The written statement must also

indicate whether any exclusions under paragraph (d)(1)(iii) of this

section are claimed.

(D) Disallowance of marital deduction in case of substantial

undervaluation of QDOT property in certain situations. (1) If either--

(i) The bond or letter of credit security arrangement under

paragraph (d)(1)(i) (B) or (C) of this section is chosen by the U.S.

Trustee; or

(ii) The QDOT property as originally reported on the decedent's

estate tax return is valued at $2 million or less but, as finally

determined for federal estate tax purposes, the QDOT property is

determined to be in excess of $2 million, then the marital deduction

will be disallowed in its entirety for failure to comply with the

requirements of section 2056A if the value of the QDOT property

reported on the estate tax return is 50 percent or less of the amount

finally determined to be the correct value of such property for federal

estate tax purposes.

(2) The preceding sentence shall not apply if--

(i) There was reasonable cause for such undervaluation; and

(ii) The fiduciary of the estate acted in good faith with respect

to such undervaluation. For this purpose, Sec. 1.6664-4(b) of this

chapter applies, to the extent applicable, with respect to the facts

and circumstances to be taken into account in making this

determination.

(ii) QDOTs with assets of $2 million or less. If the fair market

value of the assets passing, treated, or deemed to have passed to the

QDOT (or in the form of a QDOT), determined without reduction for any

indebtedness with respect to the assets, as finally

[[Page 43561]]

determined for federal estate tax purposes, is $2 million or less as of

the date of the decedent's death or, if applicable, the alternate

valuation date (adjusted as provided in paragraph (d)(1)(iii) of this

section), the trust instrument must require that no more than 35

percent of the fair market value of the trust assets, determined

annually on the last day of the taxable year of the trust (or on the

last day of the calendar year if the QDOT does not have a taxable

year), may consist of real property located outside of the United

States, or the trust must meet the requirements prescribed by paragraph

(d)(1)(i) (A), (B), or (C) of this section. See paragraph (d)(1)(ii)(D)

of this section for special rules in the case of principal

distributions from a QDOT and fluctuations in the value of the foreign

real property held by a QDOT due to changes in value of foreign

currency. See paragraph (d)(1)(iii) of this section for a special rule

for principal residences. If the fair market value, as originally

reported on the decedent's estate tax return, of the assets passing or

deemed to have passed to the QDOT (determined without reduction for any

indebtedness with respect to the assets) is $2 million or less, but the

fair market value of the assets as finally determined for federal

estate tax purposes is more than $2 million, the U.S. Trustee shall

have a reasonable period of time (not exceeding sixty days after the

conclusion of the proceeding or other action resulting in a final

determination of the value of the assets) to meet the requirements

prescribed by paragraph (d)(1)(i) (A), (B), or (C) of this section.

However, see paragraph (d)(1)(i)(D) of this section in the case of a

substantial undervaluation of QDOT assets.

(A) Multiple QDOTs. For purposes of this paragraph (d)(1)(ii), if

more than one QDOT is established for the benefit of the surviving

spouse, the fair market value of all the QDOTs are aggregated in

determining whether the $2 million threshold under this paragraph

(d)(1)(ii) is exceeded.

(B) Look-through rule. For purposes of determining whether no more

than 35 percent of the fair market value of the QDOT assets consists of

foreign real property, if the QDOT owns more than 20% of the voting

stock or value in a corporation with 15 or fewer shareholders, or more

than 20% of the capital interest of a partnership with 15 or fewer

partners, then all assets owned by the corporation or partnership are

deemed to be owned directly by the QDOT to the extent of the QDOT's pro

rata share of the assets of that corporation or partnership. In the

case of a partnership, the QDOT partner's pro rata share shall be based

on the greater of its interest in the capital or profits of the

partnership. For purposes of this paragraph, all stock in the

corporation, or interests in the partnership, as the case may be, owned

by or held for the benefit of the surviving spouse, or any members of

the surviving spouse's family (within the meaning of section

267(c)(4)), are treated as owned by the QDOT solely for purposes of

determining the number of partners or shareholders in the entity and

the QDOT's percentage voting interest or value in the corporation or

capital interest in the partnership, but not for the purpose of

determining the QDOT's pro rata share of the assets of the entity.

(C) Interests in other entities. Interests owned by the QDOT in

other entities (such as an interest in a trust) are accorded treatment

consistent with that described in paragraph (d)(1)(ii)(B) of this

section.

(D) Special rule for foreign real property. For purposes of this

paragraph (d)(1)(ii), if, on the last day of any taxable year during

the term of the QDOT (or the last day of the calendar year if the QDOT

does not have a taxable year), the value of foreign real property owned

by the QDOT exceeds 35 percent of the fair market value of the trust

assets due to distributions of QDOT principal during that year or

because of fluctuations in the value of the foreign currency in the

jurisdiction where the real estate is located, the QDOT will not be

treated as failing to meet the requirements of paragraph (d)(1) of this

section and, therefore, will not cease to be a QDOT within the meaning

of Sec. 20.2056A-5(b)(3) if, by the end of the taxable year (or the

last day of the calendar year if the QDOT does not have a taxable year)

of the QDOT immediately following the year in which the 35 percent

limit was exceeded, the value of the foreign real property held by the

QDOT does not exceed 35 percent of the fair market value of the trust

assets or, alternatively, the QDOT meets the requirements of either

paragraph (d)(1)(i) (A), (B), or (C) of this section on or before the

close of that succeeding year.

(iii) Special rules for principal residence and related personal

effects--(A) Two million dollar threshold. For purposes of determining

whether the $2 million threshold under paragraphs (d)(1) (i) and (ii)

of this section has been exceeded, the executor of the estate may elect

to exclude up to $600,000 in value attributable to real property

wherever situated (and related furnishings) owned directly by the QDOT

that is used by the surviving spouse as the spouse's principal

residence and that passes, or is treated as passing, to the QDOT under

section 2056(d). The election is made by attaching a written statement

claiming the exclusion to the estate tax return on which the QDOT

election is made.

(B) Security requirement. For purposes of determining the amount of

the bond or letter of credit required in cases where paragraph

(d)(1)(i) (B) or (C) of this section applies, the executor of the

estate may elect to exclude, during the term of the QDOT, up to

$600,000 in value attributable to real property, wherever situated (and

related furnishings) owned directly by the QDOT that is used by the

surviving spouse as the spouse's principal residence and that passes,

or is treated as passing, to the QDOT under section 2056(d). The

election may be made regardless of whether the real property is

situated within or without the United States. The election is made by

attaching to the estate tax return on which the QDOT election is made a

written statement claiming the exclusion.

(C) Foreign real property limitation. The special rules of this

paragraph (d)(1)(iii) do not apply for purposes of determining whether

more than 35 percent of the QDOT assets consist of foreign real

property under paragraph (d)(1)(ii) of this section.

(D) Principal residence. For purposes of this paragraph

(d)(1)(iii), the term principal residence has the same meaning as

prescribed in section 1034 and the regulations thereunder. A principal

residence may include appurtenant structures used by the surviving

spouse for residential purposes and adjacent land not in excess of that

which is reasonably appropriate for residential purposes (taking into

account the residence's size and location).

(E) Related furnishings. The term related furnishings means

furniture and commonly included items such as appliances, fixtures,

decorative items and china, that are not beyond the value associated

with normal household and decorative use. Rare artwork, valuable

antiques, and automobiles of any kind or class are not within the

meaning of this term.

(F) Annual statement. If one or both of the exclusions provided in

paragraph (d)(1)(iii) (A) or (B) of this section are elected by the

executor of the estate, the U.S. Trustee must file the statement

required under paragraph (d)(3) of this section at the time and in the

manner provided in paragraph (d)(3) of this section. In addition, an

annual statement must be filed by the U.S. Trustee under the

circumstances

[[Page 43562]]

described in paragraphs (d)(3)(iii) (C) and (D) of this section.

(G) Cessation of use. Except as provided in this paragraph

(d)(1)(iii)(G), if the residence ceases to be used as the principal

residence of the spouse, or if the residence is sold during the term of

the QDOT, the exclusions provided in paragraph (d)(1)(iii) (A) and (B)

of this section will cease to apply. However, in the case of such a

sale, the exclusions will continue to apply if, within 12 months of the

date of sale, the amount of the adjusted sales price (as defined in

section 1034(b)(1)) is used to purchase a new principal residence for

the spouse. If less than the amount of the adjusted sales price is so

reinvested, then the amount of the exclusions initially claimed by the

QDOT are reduced proportionately based on the amount of excess adjusted

sales price not so reinvested compared to the entire adjusted sales

price. If the QDOT ceases to qualify for all or any portion of the

initially claimed exclusions, paragraph (d)(1)(i) of this section, if

applicable (determined as if the portion of the exclusions disallowed

had not been initially claimed by the QDOT), must be complied with no

later than 120 days after the effective date of the cessation. The

Internal Revenue Service may provide in guidance published in the

Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter) for

appropriate exceptions to the cessation of use rule contained in this

paragraph (d)(1)(iii) where the principal residence of a surviving

spouse is substituted for another principal residence, when both

residences are held in a QDOT.

(iv) Anti-abuse rule. Regardless of whether the QDOT designates a

bank as the U.S. Trustee under paragraph (d)(1)(i)(A) of this section

(or otherwise complies with paragraph (d)(1)(i)(A) of this section by

naming a foreign bank with a United States branch as a trustee to serve

with the U.S. Trustee), complies with paragraph (d)(1)(i) (B) or (C) of

this section, or is subject to and complies with the foreign real

property requirements of paragraph (d)(1)(ii) of this section, the

trust immediately ceases to qualify as a QDOT if the trust utilizes any

device or arrangement that has, as a principal purpose, the avoidance

of liability for the estate tax imposed under section 2056A(b)(1), or

the prevention of the collection of the tax. For example, the trust may

become subject to this paragraph (d)(1)(iv) if the U.S. Trustee that is

selected is a domestic corporation established with insubstantial

capitalization by the surviving spouse or members of the spouse's

family.

(2) Individual trustees. If the U.S. Trustee is an individual

United States citizen, the individual must have a tax home (as defined

in section 911(d)(3)) in the United States.

(3) Annual reporting requirements--(i) In general. The U.S. Trustee

must file a written statement described in paragraph (d)(3)(iii) of

this section, if the QDOT satisfies any one of the following criteria

for the applicable reporting years--

(A) The QDOT directly owns any foreign real property on the last

day of its taxable year (or the last day of the calendar year if it has

no taxable year), and the QDOT does not satisfy the requirements of

paragraph (d)(1)(i) (A), (B), or (C) of this section by employing a

bank as trustee or providing security; or

(B) The principal residence exclusion under paragraph (d)(1)(iii)

of this section applies during the taxable year (or during the calendar

year if the QDOT has no taxable year); or

(C) The principal residence previously subject to the exclusion

under paragraph (d)(1)(iii) of this section is sold, or that principal

residence ceases to be used as a principal residence, during the

taxable year (or during the calendar year if the QDOT does not have a

taxable year); or

(D) After the application of the look-through rule contained in

paragraph (d)(1)(ii)(B) of this section, the QDOT is treated as owning

any foreign real property on the last day of the taxable year (or the

last day of the calendar year if the QDOT has no taxable year).

(ii) Time and manner of filing. The written statement, containing

the information described in paragraph (d)(3)(iii) of this section, is

to be filed for the taxable year of the QDOT (calendar year if the QDOT

does not have a taxable year) for which any of the events or conditions

requiring the filing of a statement under paragraph (d)(3)(i) of this

section have occurred or have been satisfied. The written statement is

to be submitted to the Internal Revenue Service by filing a Form 706-

QDT, with the statement attached, no later than April 15th of the

calendar year following the calendar year in which or with which the

taxable year of the QDOT ends (or by April 15th of the following year

if the QDOT has no taxable year), unless an extension of time is

obtained under Sec. 20.2056A-11(a). The Form 706-QDT, with attached

statement, must be filed regardless of whether the Form 706-QDT is

otherwise required to be filed under the provisions of this chapter.

Failure to file timely the statement may subject the QDOT to the rules

of paragraph (d)(1)(iv) of this section.

(iii) Contents of statement. The written statement must contain the

following information--

(A) The name, address, and taxpayer identification number, if any,

of the U.S. Trustee and the QDOT; and

(B) A list summarizing the assets held by the QDOT, together with

the fair market value of each listed QDOT asset, determined as of the

last day of the taxable year (December 31 if the QDOT does not have a

taxable year) for which the written statement is filed. If the look-

through rule contained in paragraph (d)(1)(ii)(B) of this section

applies, then the partnership, corporation, trust or other entity must

be identified and the QDOT's pro rata share of the foreign real

property and other assets owned by that entity must be listed on the

statement as if directly owned by the QDOT; and

(C) If a principal residence previously subject to the exclusion

under paragraph (d)(1)(iii) of this section is sold during the taxable

year (or during the calendar year if the QDOT does not have a taxable

year), the statement must provide the date of sale, the adjusted sales

price (as defined in section 1034(b)(1)), the extent to which the

amount of the adjusted sales price has been or will be used to purchase

a new principal residence and, if not timely reinvested, the steps that

will or have been taken to comply with paragraph (d)(1)(i) of this

section, if applicable; and

(D) If the principal residence ceases to be used as a principal

residence by the surviving spouse during the taxable year (or during

the calendar year if the QDOT does not have a taxable year), the

written statement must describe the steps that will or have been taken

to comply with paragraph (d)(1)(i) of this section, if applicable.

(4) Request for alternate arrangement or waiver. If the

Commissioner provides guidance published in the Internal Revenue

Bulletin (see Sec. 601.601(d)(2) of this chapter) pursuant to which a

testator, executor, or the U.S. Trustee may adopt an alternate plan or

arrangement to assure collection of the section 2056A estate tax, and

if such an alternate plan or arrangement is adopted in accordance with

such published guidance, then the QDOT will be treated, subject to

paragraph (d)(1)(iv) of this section, as meeting the requirements of

paragraph (d)(1) of this section. Until such guidance is published in

the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of this chapter),

taxpayers may submit a request for a private letter ruling for the

[[Page 43563]]

approval of an alternate plan or arrangement proposed to be adopted to

assure collection of the section 2056A estate tax in lieu of the

requirements prescribed in this paragraph (d)(4).

(5) Adjustment of dollar threshold and exclusion. The Commissioner

may increase or decrease the dollar amounts referred to in paragraph

(d)(1) (i), (ii) or (iii) of this section in accordance with guidance

published in the Internal Revenue Bulletin (see Sec. 601.601(d)(2) of

this chapter).

(6) Effective date and special rules. (i) This paragraph (d) is

effective for estates of decedents dying after March 7, 1996.

(ii) Special rule in the case of incompetency. A revocable trust or

a trust created under the terms of a will is deemed to meet the

governing instrument requirements of this paragraph (d) notwithstanding

that such requirements are not contained in the governing instrument,

if the trust instrument (or will) was executed on or before November

20, 1995, and--

(A) The testator or settlor dies after March 7, 1996;

(B) The testator or settlor is, on November 20, 1995, and at all

times thereafter, under a legal disability to amend the will or trust

instrument;

(C) The will or trust instrument does not provide the executor or

the U.S. Trustee with a power to amend the instrument in order to meet

the requirements of section 2056A; and

(D) The U.S. Trustee provides a written statement with the federal

estate tax return (Form 706 or 706NA) that the trust is being

administered (or will be administered) so as to be in actual compliance

with the requirements of this paragraph (d) and will continue to be

administered so as to be in actual compliance with this paragraph (d)

for the duration of the trust. This statement must be binding on all

successor trustees.

(iii) Special rule in the case of certain irrevocable trusts. An

irrevocable trust is deemed to meet the governing instrument

requirements of this paragraph (d) notwithstanding that such

requirements are not contained in the governing instrument if the trust

was executed on or before November 20, 1995, and:

(A) The settlor dies after March 7, 1996;

(B) The trust instrument does not provide the U.S. Trustee with a

power to amend the trust instrument in order to meet the requirements

of section 2056A; and

(C) The U.S. Trustee provides a written statement with the

decedent's federal estate tax return (Form 706 or 706NA) that the trust

is being administered in actual compliance with the requirements of

this paragraph (d) and will continue to be administered so as to be in

actual compliance with this paragraph (d) for the duration of the

trust. This statement must be binding on all successor trustees.

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

Par. 3. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Par. 4. Section 602.101(c) is amended by adding the entry

``20.2056A-2T(d)--1545-1443'' in numerical order in the table.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 21, 1994.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95-19866 Filed 8-21-95; 8:45 am]

BILLING CODE 4830-01-U