Income, Gift and Estate Tax

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, 25 and 602

[TD 8612]

RIN 1455-AM85

Income, Gift and Estate Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the

income tax imposed under chapter 1, the estate tax imposed under

chapter 11, and the gift tax imposed under chapters 12 and 14 of the

Internal Revenue Code of 1986. Changes to the marital deduction

provisions of the estate and gift tax chapters were made by the

Technical and Miscellaneous Revenue Act of 1988. Further amendments

were made by the Revenue Reconciliation Act of 1989, and the Revenue

Reconciliation Act of 1990. These final regulations will provide

guidance needed to comply with the changes to the marital deduction

provisions of the estate and gift tax chapters.

DATES: These regulations are effective August 22, 1995.

These regulations apply to decedents dying and to gifts made after

August 22, 1995.

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

toll-free number.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in these final regulations

has been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h))

under control number 1545-1360. The estimated annual burden per

respondent/recordkeeper varies from 30 minutes to 3 hours, depending on

individual circumstances, with an estimated average of 2 hours.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

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

DC 20224, and to the Office of Management and Budget, Attention: Desk

Officer for the Department of the Treasury, Office of Information and

Regulatory Affairs, Washington, DC 20503.

Background

A notice of proposed rulemaking was published in the Federal

Register (58 FR 305), on January 5, 1993, reflecting amendments made to

the Code by the Technical and Miscellaneous Revenue Act of 1988 (Pub.

L. 100-647) (the 1988 Act), the Revenue Reconciliation Act of 1989

(Pub. L. 101-239) (the 1989 Act), and the Revenue Reconciliation Act of

1990 (Pub. L. 101-508) (the 1990 Act). The 1988, 1989, and 1990 Acts

impose restrictions on the allowance of the estate and gift tax marital

deduction where the surviving spouse (in the case of a transfer at

death) or the donee spouse (in the case of a lifetime transfer) is not

a citizen of the United States. In addition, the gift tax annual

exclusion allowable in the case of a transfer to a

[[Page 43532]]

noncitizen spouse was increased to $100,000. The statutory amendments

also changed the tax rate and the amount of the unified credit

applicable in the case of the estate of a decedent nonresident not a

citizen of the United States (nonresident alien). The IRS received

written comments on the proposed regulations and, on April 2, 1993,

held a public hearing on the regulations.

After consideration of the written and oral comments received,

Sec. 20.2056A-2(d) of the proposed regulations, which provides

additional requirements for qualification as a qualified domestic trust

to ensure the collection of the section 2056A estate tax, was

substantially modified. In view of these substantial modifications,

Sec. 20.2056A-2(d) has been reissued as proposed and temporary

regulations in order to afford the public a further opportunity to

comment on these security arrangements. See the proposed rules and the

rules portion of this issue of the Federal Register, respectively. The

balance of the proposed regulations are revised and adopted as final

regulations by this Treasury decision.

The following is a discussion of the more significant comments

received (other than those comments pertaining to Sec. 20.2056A-2(d) of

the proposed regulations) and the reasons for accepting or rejecting

those comments in the final regulations.

A. Section 1.1015-5 Increased Basis for Gift Tax Paid in the Case of

Gifts Made After December 31, 1976

This section of the proposed regulations has been revised to better

conform to the existing regulations and to clarify the determination of

the amount of the gift tax paid in situations where the donor's unified

credit is applied against the gift tax liability.

B. Section 20.2056A-1 Restrictions on Allowance of Marital Deduction

if Surviving Spouse is Not a United States Citizen

Under section 2056(d)(4), if the surviving spouse becomes a citizen

of the United States before the day on which the estate tax return is

filed, property passing from the decedent to the surviving spouse

either outright or in trust need not be transferred to a qualified

domestic trust (QDOT) (or the trust need not be reformed to qualify as

a QDOT) in order to qualify for the estate tax marital deduction. It is

possible that the naturalization process may not be completed before

the due date, including extensions, for filing the estate tax return.

Comments suggested that if the surviving spouse has filed an

application for naturalization within a reasonable time after the

decedent's death, then any late filing of the return pending the

outcome of the citizenship process should be treated as due to

reasonable cause for purposes of section 6651 (imposing penalties for

failure to file returns and failure to pay tax). This suggestion was

not adopted because the existence of reasonable cause for late-filing

and late-payment should be determined on a case by case basis applying

well-established standards as prescribed under current law.

In response to comments, the discussion in Sec. 20.2056A-1(c) of

the proposed regulations, regarding the special rule for estate and

gift tax treaties, was expanded. Section 7815(d)(14) of the 1989 Act

added a special rule under which the statutory amendments affecting the

estate and gift tax marital deduction do not apply when the decedent or

donor is not a United States citizen or resident and is a resident of a

country with which the United States has an estate, gift or inheritance

tax treaty, to the extent such statutory amendments would be

inconsistent with the treaty provisions. The final regulations provide

that under this special rule, the estate may choose either the

statutory deduction under section 2056A or the marital deduction,

exemption, or credit allowed under the treaty. See H. Rep. No. 247, 101

Cong. 1st Sess. 1435, n. 99 (September 20, 1989). Thus, the estate may

not avail itself of both the marital benefit under the treaty and the

marital deduction under the QDOT provisions of the Code with respect to

the remainder of the marital property that is not otherwise deductible

under the treaty. These regulations do not conflict with existing

treaties.

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

Under Sec. 20.2056A-2(a) of the proposed regulations, in order to

qualify as a QDOT, a trust must be created and maintained under the

laws of the United States or any state or the District of Columbia.

Several commentators suggested that this requirement should be deleted

because it places an additional burden on nonresident aliens with only

limited contacts with the United States. This comment was not adopted.

The ability of the Internal Revenue Service to collect the section

2056A estate tax is adequately protected only if the trust has a

sufficient nexus with the United States. However, the final regulations

delete the requirement that the trust be created under the laws of the

United States. In lieu of that requirement, the final regulations

provide that the trust may be established by a document executed under

the laws of either the United States or a foreign jurisdiction, such as

under a foreign will or trust, provided that the document directs that

the laws of a particular state of the United States or the District of

Columbia govern the administration of the trust, and that direction is

effective under the applicable local law. The final regulations also

clarify that a trust is ``maintained'' in the United States for

purposes of this provision if the records of the trust (or copies

thereof) are kept in the United States.

Section 20.2056A-2(a) of the proposed regulations also provided

that in order to qualify as a QDOT, a trust must constitute an

``explicit trust'' as defined in Sec. 301.7701-4(a) of the regulations.

The final regulations change this reference to an ``ordinary trust'',

since that is the term referred to in Sec. 301.7701-4(a). Some

commentators raised the concern that if property transferred to a QDOT

includes an active trade or business, the trust may be classified as an

association taxable as a corporation under Sec. 301.7701-2 and,

therefore, will not qualify as a QDOT. In response to those comments,

the final regulations provide that a trust will not fail to be treated

as an ordinary trust under Sec. 301.7701-4(a) for purposes of section

2056A solely because of the nature of the assets transferred to that

trust.

D. Section 20.2056A-3 QDOT Election

Comments were received recommending that the protective election

rules contained in Sec. 20.2056A-3(c) of the proposed regulations be

expanded to permit protective elections with respect to a broader range

of controversies affecting the availability of the marital deduction

for property passing to or for the benefit of a noncitizen spouse and

the time period during which such controversies must arise. In response

to these comments, the availability of a protective election has been

revised to cover additional situations. The final regulations provide

that a protective election may be made only if a bona fide issue is

presented, the resolution of which is uncertain at the time the federal

estate tax return is filed. The bona fide issue must concern the

residency or citizenship of the decedent, the citizenship of the

surviving spouse, whether an asset is includible in the decedent's

gross estate, or the amount or nature of the property the surviving

spouse is entitled to receive. Conforming changes have been made to the

protective assignment rules

[[Page 43533]]

of the proposed regulations to reflect these amendments.

Under Sec. 20.2056A-3(b) of the proposed regulations, partial QDOT

elections were not permitted. However, the proposed regulations provide

that if a trust is severed in accordance with the rules under section

2056(b)(7), a QDOT election may be made for each separate trust. A

comment was received stating that the phrase ``for each separate

trust'' implies that if there are two or more trusts after division, an

election must be made for each trust. The final regulations clarify

that upon severance of a trust, a QDOT election may be made for any one

or more of the severed trusts.

E. Section 20.2056A-4 Procedures for Conforming Marital Trusts and

Nonmarital Transfers to the Requirements of a Qualified Domestic Trust

A comment was received pointing out that the proposed regulations

did not specify the time by which a nonjudicial reformation must be

completed. Accordingly, the final regulations provide that a

nonjudicial reformation must be completed by the time prescribed

(including extensions) for filing the decedent's estate tax return.

This result is consistent with section 2056(d)(5)(A), which provides

that absent a judicial reformation the determination of the

qualification of a trust as a QDOT is made as of the date the return is

filed.

Section 20.2056A-4(a)(2) of the proposed regulations provide that a

trust, as reformed, must be effective under local law and irrevocable.

A trust in which the surviving spouse has an income interest and an

inter vivos general power of appointment is, in effect, revocable and

could, therefore, fail to qualify under the proposed regulations.

Accordingly, the final regulations have been amended to provide that

the trust as reformed may be revocable by the spouse, or otherwise be

subject to the spouse's general power of appointment, provided that

there is no power exercisable by any person to amend the trust during

the continued period of its existence such that it would no longer

qualify as a QDOT. Thus, for example, any distributions made pursuant

to the spouse's exercise of a power to appoint must be subject to the

requirement that the U.S. Trustee withhold the section 2056A estate

tax.

The final regulations provide that prior to the time a judicial

reformation of the trust is completed, the trustee is responsible for

filing the Form 706-QDT, paying any section 2056A estate tax that

becomes due, and filing the annual report if such a report is required.

In addition, failure to comply with these requirements may cause the

trust to be subject to the anti-abuse rule under Sec. 20.2056A-

2T(d)(1)(iv). A claim for refund may be filed to recover any section

2056A estate tax paid by the trust if the judicial reformation is

terminated prior to completion. In addition, if the judicial

reformation is terminated prior to completion, the trustee of the trust

is liable for the additional estate tax on the decedent's estate that

becomes due at the time of the termination due to the trust's failure

to comply with section 2056A.

Comments were received criticizing the rule contained in

Sec. 20.2056A-4(b)(5) of the proposed regulations, that a transfer of

property by the surviving spouse or the decedent's executor to a QDOT

created by the spouse pursuant to section 2056(d)(2)(B) is treated as a

transfer from the decedent solely for purposes of section

2056(d)(2)(A). For all other purposes, e.g., income, gift, estate,

generation-skipping transfer tax and section 1491, the proposed

regulations provide that the property is treated as passing from the

surviving spouse to the trust. The comments suggested that although

section 2056A(b)(15) provides for tax exempt reimbursement to the

spouse of income taxes paid by the spouse with respect to trust items,

that provision should not be interpreted as acknowledging that all

QDOTs created by the surviving spouse or by the decedent's executor are

grantor trusts for income tax purposes.

The final regulations retain the rule that the surviving spouse is

treated as the transferor of the property transferred to a QDOT

pursuant to section 2056(d)(2)(B). It is believed that this treatment

is consistent with Congressional intent, as evidenced by section

2056A(b)(15). However, because of the potentially unanticipated result

in the case of completed transfers to trusts by the surviving spouse

where the spouse retains an income interest, Sec. 25.2702-1(c) of the

regulations is amended by this document to provide that property

assigned or transferred to a QDOT by the surviving spouse, where the

surviving spouse retains an income interest in the transferred

property, is not subject to the special valuation rules of section

2702. See Sec. 25.2702-1(c)(8). The final regulations also provide that

the surviving spouse is not considered the transferor of property to a

QDOT if the transfer by the spouse constitutes a transfer that

satisfies the requirements of section 2518(c)(3).

Section 20.2056A-4(b) of the proposed regulations provide that if

property is transferred or assigned to a QDOT by the surviving spouse

pursuant to section 2056(d)(2)(B), the QDOT need not be a trust that

would otherwise qualify for a marital deduction under section 2056(a).

A question has been raised whether this rule applies regardless of

whether the trust was created by the decedent during life or by will,

by the surviving spouse, or by the decedent's executor. Accordingly,

the final regulations clarify that if the spouse transfers property to

a QDOT pursuant to section 2056(d)(2)(B), the transferee trust need not

(with one exception) be in a form necessary to qualify for a marital

deduction under section 2056(a) regardless of whether the trust is

created by the decedent, the surviving spouse or the decedent's

executor. However, the final regulations provide that, once funded, 100

percent of the transferee trust must consist of assets that qualify for

the marital deduction under the Code. This rule is necessary to avoid

complicated tracing issues under section 2056A(b)(1). Therefore, if the

decedent also bequeaths property to the trust under his will, the trust

will need to conform to the marital trust requirements in order that

all of the trust property qualifies for the marital deduction under

section 2056(a).

Section 20.2056A-4(b)(3) of the proposed regulations provide that

only assets passing from the decedent to the spouse that are included

in the decedent's gross estate may be transferred or assigned to a

QDOT. The language of the proposed regulations could be viewed as

providing that assets originally owned at any time by the surviving

spouse cannot be assigned to the QDOT, even if those assets in fact are

included in the decedent's gross estate. For example, a question has

been raised whether property owned by the surviving spouse that was

transferred to the decedent and then subsequently bequeathed to the

surviving spouse could be transferred or assigned to a QDOT. In order

to address this concern, the final regulations have been clarified to

provide that the surviving spouse may transfer or assign to the QDOT

any property included in the decedent's gross estate and passing to the

spouse at death. However, the spouse may not transfer property owned by

the spouse at the time of the decedent's death, in lieu of property

passing from the decedent.

In response to comments, the final regulations specifically address

the transfer or assignment of property to a QDOT in the case of the

death or incompetency of the surviving spouse. The final regulations

provide that the transfer or assignment of property to a

[[Page 43534]]

QDOT may be made by either the surviving spouse, the surviving spouse's

legal representative (if the surviving spouse is incompetent), or by

the surviving spouse's executor (if the surviving spouse subsequently

dies).

Comments were received suggesting that the method adopted in

Sec. 20.2056A-4(c)(4) of the proposed regulations for computing the

``corpus portion'' of a nonassignable annuity payment be revised. The

comments suggested that the corpus portion of each payment should be

computed based on that portion of each payment excluded from the

spouse's income under section 72. Alternatively, it was suggested that

the determination of the corpus portion should be keyed to the

threshold for imposition of the section 4980A excise tax on excess

distributions (generally amounts distributed in excess of $150,000).

Both of these suggestions were rejected. The methodology in the

regulations is designed to realistically approximate the portion of

each payment representing income and corpus based on the present value

of the benefit, the expected term of the annuity, and the assumed rate

of return. On the other hand, basing the determination on the extent to

which each payment is included in the spouse's income would produce

arbitrary and unrealistic results. For example, in the case of a

noncontributory qualified plan, the entire payment will be includible

in gross income and thus no portion would be allocated to corpus.

Similarly, under the section 4980A approach, the first $150,000 of

payments will be arbitrarily allocated to income regardless of the

amount of the total annual payment. It is believed that neither of

these methods provides an accurate or realistic measure of the income

or corpus portion of each payment.

Guidance was requested regarding whether an individual retirement

account (IRA) described in section 408(a) is a nonassignable annuity or

other arrangement eligible for the procedures contained in

Sec. 20.2056A-4(c). In general, individual retirement accounts under

section 408(a) are assignable but individual retirement annuities under

section 408(b) are not assignable (and thus, are eligible for the

special procedures described in Sec. 20.2056A-4(c)). However, if an

individual retirement account is assigned to a trust with respect to

which the surviving spouse is not treated as the owner under section

671 et seq. (providing rules for the treatment of grantor trusts), then

the entire account balance is treated as a distribution to the spouse

includible in the spouse's gross income under section 408(d) in the

taxable year in which the assignment is made.

In view of this significant tax burden attendant to the assignment

of an individual retirement account to a nongrantor trust, the final

regulations allow the spouse to treat the individual retirement account

as nonassignable for purposes of Sec. 20.2056A-4(c) and thus, eligible

for the procedures contained in that section. However, if the spouse

does assign the individual retirement account to a trust pursuant to

Secs. 20.2056A-2(b)(2) and 20.2056A-4(b) (either a grantor trust or a

nongrantor trust), then Sec. 20.2056A-4(b)(7) (providing that an

assignment of an assignable annuity or other arrangement to a trust is

treated as a transfer of the property to a QDOT regardless of the

method of payment actually elected) will apply. Thus, under the final

regulations, if the individual retirement account is assignable, the

spouse has the option of either assigning the individual retirement

account to a QDOT, or using the procedures contained in Sec. 20.2056A-

4(c).

In response to comments, Sec. 20.2056A-4(c) of the proposed

regulations has been modified to provide that if the financial

circumstances of the spouse are such that an amount equal to all or a

part of the corpus portion of a nonassignable annuity payment received

by the spouse would be eligible for a hardship exemption (as defined in

Sec. 20.2056A-5(c)), if paid from a QDOT, then all or a corresponding

part of the payment will be exempt from the rollover or the tax payment

requirements, depending upon which option is selected by the spouse.

In response to comments, the agreements required under

Sec. 20.2056A-4(c) of the proposed regulations (pertaining to the

spouse's undertaking to roll over nonassignable annuity payments to a

QDOT or pay a section 2056A estate tax on each payment) have been

revised. In the final regulations, both forms of agreements provide

that in the event of a failure to timely file the Form 706-QDT or a

failure to either (1) timely pay the section 2056A estate tax on the

corpus portion of the annuity payment, or (2) timely roll over the

corpus portion to a QDOT, the surviving spouse may make an application

for relief under Sec. 301.9100-1 of the Procedure and Administration

Regulations, from the consequences of the failures. This is in lieu of

the automatic acceleration of the balance of the section 2056A estate

tax as provided in the proposed regulations.

Under the proposed regulations, both forms of agreements provided

that the surviving spouse must agree, at the request of the District

Director (or the Assistant Commissioner (International) in the case of

a surviving spouse of a nonresident alien decedent or a surviving

spouse of a United States citizen who died domiciled outside the United

States) to enter into a security agreement to secure the spouse's

undertakings under the agreement. Comments were received objecting to

the open-ended nature of this security requirement. In response to

these comments, the final regulations have been amended so that this

provision applies only in those cases in which the plan or arrangement

from which the annuity will be paid is established and administered by

a person or entity that is located outside of the United States. In the

case of these foreign plans, additional security requirements may be

necessary to assure collectibility of the section 2056A estate tax.

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

Comments were received regarding Sec. 20.2056A-5(c)(2) of the

proposed regulations which provides that items will be characterized as

``income'' for purposes of section 2056A(b)(3)(A) and section

2056A(c)(2) based on applicable state law, regardless of the terms of

the instrument. Commentators maintained that this provision created

unnecessary complexity in the administration of QDOTs in jurisdictions

with no statutes governing allocation of receipts between principal and

income. The commentators suggested that if local law or statutory law

is silent regarding treatment of an item, the allocation of the item

should be based on the terms of the governing instrument with certain

specified exclusions (such as capital gains). This suggestion was not

adopted, in part, because the grant of this broad discretion would not

be consistent with the legislative history underlying section

2056A(b)(1). Instead, the final regulations provide that when local law

is silent, reference will be made to general principles of law (such

as, for example, the Uniform Principal and Income Act) and that these

principles will override any provisions to the contrary in the

governing instrument. In addition, the final regulations provide that

for purposes of section 2056A(b)(3)(A), ``income'' does not include (in

addition to the exclusion for capital gains) items constituting income

in respect of a decedent under section 691, regardless of the

characterization thereof under local law, except to the extent provided

in administrative guidance published by the Service. The IRS added this

exclusion because it is

[[Page 43535]]

believed that local law may inappropriately characterize certain items

of IRD (income in respect of a decedent) as income, contrary to the

purposes of section 2056A, and it was determined that exceptions to

this rule of exclusion should be made on a case by case basis. However,

in cases where a QDOT is designated by the decedent as a beneficiary of

a pension or profit sharing plan described in section 401(a), or an

individual retirement account or annuity described in section 408, the

proceeds of which are payable to the QDOT in the form of an annuity,

the final regulations provide that any payments received by the QDOT

may be allocated between income and corpus using the method prescribed

under Sec. 20.2056A-4(c) for determining the corpus and income portion

of an annuity payment.

A comment was received recommending revision of Sec. 20.2056A-

5(c)(3) of the proposed regulations to specifically authorize

nontaxable reimbursement to the spouse for income taxes for which the

spouse is liable if the spouse receives a lump sum distribution from a

qualified plan and assigns the distribution to the QDOT. In response to

this comment, the final regulations have been modified to provide that

amounts paid from the QDOT to reimburse the spouse for such income

taxes are not subject to the section 2056A estate tax. In addition, the

provisions for nontaxable distributions to the spouse contained in

section 2056A(b)(15) (regarding reimbursement for certain income taxes

paid by the spouse) have been incorporated into Sec. 20.2056A-5(c)(3)

of the final regulations to ensure completeness. With respect to the

amount of the reimbursement, the final regulations provide that the

amount of tax eligible for reimbursement is the difference between the

income tax liability of the spouse (as reported on the spouse's income

tax return) and the spouse's income tax liability determined as if the

item had not been included in the spouse's gross income in the

applicable taxable year.

In response to comments, the definition of a hardship distribution

has been expanded. Under the final regulations, a distribution to the

spouse is deemed made on account of hardship if the distribution is

made to the spouse from the QDOT in response to an immediate and

substantial financial need relating to the spouse's health,

maintenance, education or support, or the health, education,

maintenance or support of any person that the surviving spouse is

legally obligated to support.

One comment suggested modifying the regulations to provide that in

making a distribution, the trustee may rely upon a statement by the

surviving spouse claiming hardship under the regulations. It was

decided that this change not be made. Trustees must frequently make

decisions concerning whether a distribution is warranted under a

particular standard under the trust document. It is believed that a

QDOT presents no special circumstances that would justify a deviation

from normal fiduciary practices under these circumstances.

Language has been added to the final regulations to further clarify

what assets are considered ``reasonably available'' to the surviving

spouse for purposes of determining whether the assets must be

liquidated before a hardship distribution may be made. The final

regulations provide that assets such as closely held business

interests, real estate and tangible personalty are not considered

assets that are reasonably available.

G. Section 20.2056A-6 Amount of Tax

Under the proposed regulations, in computing the estate tax imposed

under section 2056A(b)(1)(B) on the death of the surviving spouse, a

credit for state or foreign death taxes under sections 2011 or 2014,

respectively, is allowable only if the state or foreign jurisdiction

actually imposed additional tax on the QDOT at the time of the taxable

event (i.e., only if the jurisdiction had a statutory provision similar

in effect to section 2056A). A comment was received that this

limitation was inappropriate and was not consistent with the

legislative history underlying section 2056A(b)(10). See 136 Cong. Rec.

H7147 (daily ed. Aug. 3, 1990). In response to this comment, the final

regulations provide that if state or foreign death taxes are paid by

the surviving spouse's estate with respect to the QDOT (because the

QDOT is included in the surviving spouse's gross estate for state or

foreign tax purposes), the taxes are creditable to the extent provided

in sections 2011 or 2014 in computing the section 2056A estate tax. In

addition, the final regulations provide that state or foreign death

taxes previously paid by the decedent/transferor's estate are also

creditable within the section 2011 or 2014 framework. A new example has

been added to the final regulations to illustrate this application of

the state death tax credit.

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

2013

The proposed regulations provided that the ``first limitation'' in

determining the allowable section 2013 credit with respect to the

section 2056A estate tax imposed on the spouse's death is deemed to be

the section 2056A estate tax imposed. This approach was adopted to

avoid certain computational and interpretative problems that would be

presented if the methodology described in section 2013(b) and

Sec. 20.2013-2 was used. The final regulations retain this approach.

In order to ensure consistency, the final regulations adopt two

additional modifications to the section 2013 regime in computing the

allowable credit with respect to the section 2056A estate tax. Under

Sec. 20.2013-4(a), the amount of the transfer, based on which the

``first limitation'' and ``second limitation'' are determined, is the

value at which the property was included in the transferor's gross

estate. Further, under Sec. 20.2013-4(b), the amount of the transfer is

reduced by any estate and inheritance taxes payable out of the property

transferred to the transferee decedent. However, under Sec. 20.2056A-7,

the ``first limitation'' is the amount of the section 2056A estate tax

determined based on the value of the QDOT on the death of the

transferee spouse and any corpus distributions made prior to that time

that were subject to tax under section 2056A(b)(1)(A). This same value

should be used in determining the ``second limitation.'' Further, since

the entire value of the QDOT, unreduced by the amount of the section

2056A estate tax, is included in the transferee spouse's gross estate

(see section 2053(c)(1)(B)), this amount (unreduced by the section

2056A estate tax) should be used in determining the ``second

limitation''. Otherwise, the credit mechanism will not adequately avoid

the double taxation the credit was intended to alleviate in the case of

property which has appreciated since the death of the first decedent,

and would confer an unintended windfall in the case of property which

has declined in value. Accordingly, the final regulations provide that,

for purposes of the ``second limitation'' as described in section

2013(c), the value of the property transferred to the decedent is the

value of the QDOT on the date of death of the surviving spouse. This

value is not reduced by the section 2056A estate tax imposed at the

time of the spouse's death. An example has been added illustrating the

computation of the prior transfer credit.

[[Page 43536]]

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

Several comments were received concerning the proper interpretation

of sections 2056(d)(1) and 2056(d)(2) where joint property passing to a

spouse is transferred by the spouse to a QDOT. Section 2056(d)(1)

provides that if the surviving spouse is not a citizen then, except as

provided in section 2056(d)(2), no marital deduction is allowed and

section 2040(a), rather than section 2040(b), applies in determining

the extent to which the joint property is included in the decedent's

gross estate. Section 2056(d)(2) provides, inter alia, that section

2056(d)(1) does not apply to any property passing to a QDOT. Comments

have been received suggesting that under a literal interpretation of

these provisions, if joint property includible in the decedent's gross

estate is transferred by the surviving spouse to a QDOT, the provisions

of section 2056(d)(1)(B) do not apply and, therefore, section 2040(b)

(and not section 2040(a)) would apply to determine the extent to which

the joint property is included in the gross estate. The final

regulations do not adopt this comment. The statutory provisions should

be interpreted as providing that section 2040(a) applies in all events

in determining the extent to which spousal joint property is includible

in the gross estate, regardless of whether the spouse transfers the

property to a QDOT. Under section 2056(d)(2), any property so

includible will qualify for the marital deduction if it is timely

transferred to a QDOT. The result of the suggested interpretation would

be circular in effect: the gross estate would be continually reduced by

transfers of property to the QDOT and the size of the gross estate

would affect the amount that would need to be transferred to the QDOT

so that no net estate tax would be due.

Commentators requested clarification of the ``consideration

furnished'' rule contained in Sec. 20.2056A-8(a)(2) of the proposed

regulations has been clarified. This rule provided that for purposes of

applying section 2040(a), in determining the amount of consideration

furnished by the surviving spouse, any consideration furnished by the

decedent with respect to the acquisition of the property before July

14, 1988, is treated as consideration furnished by the surviving spouse

to the extent that the consideration was treated as a gift to the

spouse under section 2511, or to the extent that the decedent elected

to treat the transfer as a gift to the spouse under section 2515 (prior

to repeal by the Economic Recovery Tax Act of 1981). Under the proposed

regulations, this special rule was applicable only if the donor spouse

predeceased the donee spouse. The final regulations clarify that in

cases where the donee spouse predeceases the donor spouse, the amount

treated as a gift to the decedent/donee spouse on the creation of the

tenancy is not treated as the donee spouse's contribution towards the

acquisition of the property for purposes of section 2040(a). Thus, if

the donee spouse provided no other consideration towards the

acquisition of the property, no part of the property would be

includible in the decedent/donee's gross estate under section 2040(a).

No inference is intended as to the applicable rules in effect prior to

the effective date of these regulations. Two additional examples have

been added to further illustrate the application of the joint property

rules.

J. Section 20.2056A-9 Designated Filer

In response to comments, the time period accorded the U.S. Trustee

for submitting Schedule B, Form 706-QDT, to the Designated Filer has

been increased from thirty to sixty days prior to the due date for

filing the return. Also, in response to comments, the rule in the

proposed regulations that the Designated Filer may allocate the section

2056A estate tax among the various QDOTs in the Designated Filer's

discretion has been modified. The final regulations provide that the

tax due from each QDOT is allocated on a pro rata basis (based on the

ratio of the amount of the respective taxable events in each QDOT to

the amount of all such taxable events), unless a different allocation

is required in the governing instrument or under local law.

In response to comments suggesting that the regulations provide

guidance in the event that the Designated Filer ceases to qualify as a

U.S. Trustee, the final regulations provide that unless the decedent

has provided for a successor Designated Filer, if the Designated Filer

ceases to qualify as a U.S. Trustee or otherwise becomes unable to

serve as the Designated Filer, the remaining trustees are required to

select a qualifying successor Designated Filer (who is also a U.S.

Trustee) prior to the due date for the filing of the next Form 706-QDT.

Failure to select a successor Designated Filer will result in the

application of section 2056A(b)(2)(C).

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

2056A Estate Tax

Comments were received suggesting that in the case of multiple

QDOTs with respect to the same decedent, the extent of the trustees'

liability for the amount of the section 2056A estate tax should be

clarified. It was suggested that a trustee should be personally liable

for the amount of any section 2056A estate tax imposed on any taxable

event with respect to that trustee's trust, but should not be

personally liable for tax imposed on the other trusts with respect to

that decedent. In response to this comment, the trustee liability

provisions of Sec. 20.2056A-11(d) of the proposed regulations have been

modified. In the case of multiple QDOTs with respect to the same

decedent, each trustee of a QDOT is personally liable for the amount of

the tax imposed on any taxable event with respect to that trustee's

QDOT and a trustee is not personally liable for tax imposed with

respect to taxable events involving QDOTs of which that person is not a

trustee. However, the assets of a trust would be subject to collection

for the section 2056A estate tax due with respect to any other trust

with respect to that decedent.

L. Section 25.2523(i)-1 Disallowance of Gift Tax Marital Deduction

When Spouse Is Not a United States Citizen

Comments were received concerning the conclusion in example 4 under

Sec. 25.2523(i)-1(d) of the proposed regulations. This example involves

the transfer in trust to a noncitizen spouse with income payable to the

spouse for life and remainder to the children of the donor. As

proposed, the example concludes that the transfer is eligible for the

$100,000 annual exclusion based on the rationale that if the donee were

a citizen, the gift would qualify for a marital deduction if a

qualified terminable interest property election were made. In response

to the comments on this issue, the IRS has concluded that this result

is not consistent with the statute because the gift does not qualify

for the marital deduction ``but for'' the application of section

2523(i)(1). See section 2523(i)(2). The gift only qualifies for the

marital deduction if an election is made under section 2523(f)(4) to

treat the trust as qualified terminable interest property. This

election is not available if the donee spouse is not a United States

citizen. The statutory requirement that only gifts that would have

qualified for the marital deduction but for section 2523(i) are

eligible for the increased annual exclusion is intended to ensure that

only gifts that would be includible in the spouse's gross estate at

death (if the spouse were a United States citizen) qualify for the

increased exclusion. This was not the case in the example as proposed

and, as a result, the

[[Page 43537]]

conclusion in the example has been changed.

M. Section 25.2523(i)-2 Treatment of Spousal Joint Tenancy Property

Where One Spouse Is Not a United States Citizen

Section 2523(i)(3) provides that the rules of section 2515 prior to

repeal by the Economic Recovery Tax Act of 1981 shall generally apply

if the donee spouse is not a United States citizen. The provision is

effective for gifts made after July 14, 1988.

In response to comments, the final regulations under

Sec. 25.2523(i)-2(b) have been expanded to more fully describe the

consequences of terminations of tenancies by the entirety and joint

tenancies after July 13, 1988, where the donee spouse is not a United

States citizen. As prescribed by statute, the gift tax consequences of

the termination are governed by the principles of section 2515 (prior

to repeal) and the regulations thereunder. Generally, under these

rules, the gift tax consequences were dependent on whether or not the

creation of the tenancy was initially treated as a gift under section

2515(a). Questions have been raised regarding the gift tax treatment

for terminations of tenancies that were created after 1981 and before

July 14, 1988. During this time period, section 2515 was not applicable

and the generic principles of section 2511 governed the gift tax

treatment of the creation of a joint tenancy or tenancy by the

entirety. Accordingly, in response to these comments, the final

regulations provide that, in the case of a termination on or after July

14, 1988, of a tenancy by the entirety or a joint tenancy that was

created after 1981 and before July 14, 1988, if the creation of the

tenancy was treated as a gift to the noncitizen donee spouse under

section 2511 then, upon termination of the tenancy, the value of the

property treated as a gift upon creation of the tenancy is treated as

consideration originally belonging to the noncitizen spouse and never

acquired by the noncitizen spouse from the donor spouse. With respect

to the termination on or after July 14, 1988, of a tenancy by the

entirety or joint tenancy created after 1954 and before 1982 (during

which period section 2515 applied), the consequences of termination are

determined under the rules of section 2515 and the regulations

thereunder.

Special Analyses

It has been determined that this Treasury decision is not a

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

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

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

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

these regulations, and therefore, a Regulatory Flexibility Analysis is

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

the notice of proposed rulemaking preceding these regulations was

submitted to the Small Business Administration for comment on its

impact on small business.

Drafting Information

The principal author of these regulations is Susan B. Hurwitz,

Office of Assistant Chief Counsel (Passthroughs and Special

Industries), Internal Revenue Service. Other personnel from the IRS and

Treasury Department participated in developing these regulations.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 20

Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

Gift taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Amendments to the Regulations

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

follows:

PART 1--INCOME TAXES

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

part as follows:

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

Par. 2. Sec. 1.1015-5 is amended as follows:

a. The headings for paragraphs (a) and (b) are revised.

b. Paragraph (c) is redesignated as paragraph (d).

c. A new paragraph (c) is added.

The revisions and additions read as follows:

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

(a) General rule in the case of gifts made on or before

December 31, 1976. * * *

* * * * *

(b) Amount of gift tax paid with respect to gifts made on or before

December 31, 1976. * * *

* * * * *

(c) Special rule for increased basis for gift tax paid in the case

of gifts made after December 31, 1976--(1) In general. With respect to

gifts made after December 31, 1976 (other than gifts between spouses

described in section 1015(e)), the increase in basis for gift tax paid

is determined under section 1015(d)(6). Under section 1015(d)(6)(A),

the increase in basis with respect to gift tax paid is limited to the

amount (not in excess of the amount of gift tax paid) that bears the

same ratio to the amount of gift tax paid as the net appreciation in

value of the gift bears to the amount of the gift.

(2) Amount of gift. In general, for purposes of section

1015(d)(6)(A)(ii), the amount of the gift is determined in conformance

with the provisions of paragraph (b) of this section. Thus, the amount

of the gift is the amount included with respect to the gift in

determining (for purposes of section 2503(a)) the total amount of gifts

made during the calendar year (or calendar quarter in the case of a

gift made on or before December 31, 1981), reduced by the amount of any

annual exclusion allowable with respect to the gift under section

2503(b), and any deductions allowed with respect to the gift under

section 2522 (relating to the charitable deduction) and section 2523

(relating to the marital deduction). Where more than one gift of a

present interest in property is made to the same donee during a

calendar year, the annual exclusion shall apply to the earliest of such

gifts in point of time.

(3) Amount of gift tax paid with respect to the gift. In general,

for purposes of section 1015(d)(6), the amount of gift tax paid with

respect to the gift is determined in conformance with the provisions of

paragraph (b) of this section. Where more than one gift is made by the

donor in a calendar year (or quarter in the case of gifts made on or

before December 31, 1981), the amount of gift tax paid with respect to

any specific gift made during that period is the amount which bears the

same ratio to the total gift tax paid for that period (determined after

reduction for any gift tax unified credit available under section 2505)

as the amount of the gift (computed as described in paragraph (c)(2) of

this section) bears to the total taxable gifts for the period.

(4) Qualified domestic trusts. For purposes of section 1015(d)(6),

in the case of a qualified domestic trust (QDOT) described in section

2056A(a),

[[Page 43538]]

any distribution during the noncitizen surviving spouse's lifetime with

respect to which a tax is imposed under section 2056A(b)(1)(A) is

treated as a transfer by gift, and any estate tax paid on the

distribution under section 2056A(b)(1)(A) is treated as a gift tax. The

rules under this paragraph apply in determining the extent to which the

basis in the assets distributed is increased by the tax imposed under

section 2056A(b)(1)(A).

(5) Examples. Application of the provisions of this paragraph (c)

may be illustrated by the following examples:

Example 1. (i) Prior to 1995, X exhausts X's gift tax unified

credit available under section 2505. In 1995, X makes a gift to X's

child Y, of a parcel of real estate having a fair market value of

$100,000. X's adjusted basis in the real estate immediately before

making the gift was $70,000. Also in 1995, X makes a gift to X's

child Z, of a painting having a fair market value of $70,000. X

timely files a gift tax return for 1995 and pays gift tax in the

amount of $55,500, computed as follows:

Value of real estate transferred to Y........... $100,000 ..........

Less: Annual exclusion.......................... 10,000 ..........

------------

Included amount of gift (C)..................... .......... $90,000

Value of painting transferred to Z.............. $70,000 ..........

Less: annual exclusion.......................... 10,000 ..........

------------

Included amount of gift......................... .......... 60,000

-----------

Total included gifts (D).................... .......... $150,000

Total gift tax liability for 1995 gifts (B). .......... $55,500

(ii) The gift tax paid with respect to the real estate transferred

to Y, is determined as follows:

[GRAPHIC][TIFF OMITTED]TR22AU95.005

(iii) (A) The amount by which Y's basis in the real property is

increased is determined as follows:

[GRAPHIC][TIFF OMITTED]TR22AU95.006

(B) Y's basis in the real property is $70,000 plus $11,100, or

$81,100. If x had not exhausted any of X's unified credit, no gift

tax would have been paid and, as a result, Y's basis would not be

increased.

Example 2. (i) X dies in 1995. X's spouse, Y, is not a United

States citizen. In order to obtain the marital deduction for

property passing to X's spouse, X established a QDOT in X's will. In

1996, the trustee of the QDOT makes a distribution of principal from

the QDOT in the form of shares of stock having a fair market value

of $70,000 on the date of distribution. The trustee's basis in the

stock (determined under section 1014) is $50,000. An estate tax is

imposed on the distribution under section 2056A(b)(1)(A) in the

amount $38,500, and is paid. Y's basis in the shares of stock is

increased by a portion of the section 2056A estate tax paid

determined as follows:

[GRAPHIC][TIFF OMITTED]TR22AU95.007

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

(6) Effective date. The provisions of this paragraph (c) are

effective for gifts made after August 22, 1995.

* * * * *

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

1954

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

part as follows:

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

Par. 4. In Sec. 20.2056-0, the table of contents is amended by:

a. Redesignating the entries for Secs. 20.2056(d)-1 and 20.2056(d)-

2 as Secs. 20.2056(d)-2 and 20.2056(d)-3, respectively.

b. Adding a new entry for Sec. 20.2056(d)-1 to read as follows:

Sec. 20.2056-0 Table of contents

* * * * *

Sec. 20.2056(d)-1 Marital deduction; special rules for marital

deduction if surviving spouse is not a United States citizen.

* * * * *

Par. 5. Sections 20.2056(d)-1 and 20.2056(d)-2 are redesignated as

Secs. 20.2056(d)-2 and 20.2056(d)-3, respectively, and new

Sec. 20.2056(d)-1 is added to read as follows:

Sec. 20.2056(d)-1 Marital deduction; special rules for marital

deduction if surviving spouse is not a United States citizen.

Rules pertaining to the application of section 2056(d), including

certain transition rules, are contained in Secs. 20.2056A-1 through

20.2056A-13.

Par. 6. Sections 20.2056A-0 through 20.2056A-13 are added to read

as follows:

Sec. 20.2056A-0 Table of contents.

This section lists the captions that appear in the final

regulations under Secs. 20.2056A-1 through 20.2056A-13.

Sec. 20.2056A-1 Restrictions on allowance of marital deduction if

surviving spouse is not a United States citizen.

(a) General rule.

(b) Marital deduction allowed if resident spouse becomes

citizen.

(c) Special rules in the case of certain transfers subject to

estate and gift tax treaties.

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

(a) In general.

(b) Qualified marital interest requirements.

(1) Property passing to QDOT.

(2) Property passing outright to spouse.

(3) Property passing under a nontransferable plan or

arrangement.

(c) Statutory requirements.

(d) [Reserved]

Sec. 20.2056A-3 QDOT election.

(a) General rule.

(b) No partial elections.

(c) Protective elections.

(d) Manner of election.

Sec. 20.2056A-4 Procedures for conforming marital trusts and

nontrust marital transfers to the requirements of a qualified

domestic trust.

(a) Marital trusts.

(1) In general.

(2) Judicial reformations.

(3) Tolling of statutory assessment period.

(b) Nontrust marital transfers.

(1) In general.

[[Page 43539]]

(2) Form of transfer or assignment.

(3) Assets eligible for transfer or assignment.

(4) Pecuniary assignment--special rules.

(5) Transfer tax treatment of transfer or assignment.

(6) Period for completion of transfer.

(7) Retirement accounts and annuities.

(8) Protective assignment.

(c) Nonassignable annuities and other arrangements.

(1) Definition and general rule.

(2) Agreement to remit section 2056A estate tax on corpus

portion of each annuity payment.

(3) Agreement to roll over corpus portion of annuity payment to

QDOT.

(4) Determination of corpus portion.

(5) Information Statement.

(6) Agreement to pay section 2056A estate tax.

(7) Agreement to roll over annuity payments.

(d) Examples.

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

(a) In general.

(b) Amounts subject to tax.

(1) Distribution of principal during the spouse's lifetime.

(2) Death of surviving spouse.

(3) Trust ceases to qualify as QDOT.

(c) Distributions and dispositions not subject to tax.

(1) Distributions of principal on account of hardship.

(2) Distributions of income to the surviving spouse.

(3) Certain miscellaneous distributions and dispositions.

Sec. 20.2056A-6 Amount of tax.

(a) Definition of tax.

(b) Benefits allowed in determining amount of section 2056A

estate tax.

(1) General rule.

(2) Treatment as resident.

(3) Special rule in the case of trusts described in section

2056(b)(8).

(4) Credit for state and foreign death taxes.

(5) Alternate valuation and special use valuation.

(c) Miscellaneous rules.

(d) Examples.

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

2013.

(a) Property subject to QDOT election.

(b) Property not subject to QDOT election.

(c) Example.

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

(a) Inclusion in gross estate.

(1) General rule.

(2) Consideration furnished by surviving spouse.

(3) Amount allowed to be transferred to QDOT.

(b) Surviving spouse becomes citizen.

(c) Examples.

Sec. 20.2056A-9 Designated Filer.

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

established.

(a) Section 2056A estate tax no longer imposed under certain

circumstances.

(b) Special election by spouse.

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

2056A estate tax.

(a) Distributions during surviving spouse's life.

(b) Tax at death of surviving spouse.

(c) Extension of time for paying section 2056A estate tax.

(1) Extension of time for paying tax under section 6161(a)(2).

(2) Extension of time for paying tax under section 6161(a)(1).

(d) Liability for tax.

Sec. 20.2056A-12 Increased basis for section 2056A estate tax paid

with respect to distribution from a QDOT.

Sec. 20.2056A-13 Effective date.

Sec. 20.2056A-1 Restrictions on allowance of marital deduction if

surviving spouse is not a United States citizen.

(a) General rule. Subject to the special rules provided in section

7815(d)(14) of the Omnibus Budget Reconciliation Act of 1989 (Pub. L.

101-239; 103 Stat. 2106), in the case of a decedent dying after

November 10, 1988, the federal estate tax marital deduction is not

allowed for property passing to or for the benefit of a surviving

spouse who is not a United States citizen at the date of the decedent's

death (whether or not the surviving spouse is a resident of the United

States) unless--

(1) The property passes from the decedent to (or pursuant to)--

(i) A qualified domestic trust (QDOT) described in section 2056A

and Sec. 20.2056A-2;

(ii) A trust that, although not meeting all of the requirements for

a QDOT, is reformed after the decedent's death to meet the requirements

of a QDOT (see Sec. 20.2056A-4(a));

(iii) The surviving spouse not in trust (e.g., by outright bequest

or devise, by operation of law, or pursuant to the terms of an annuity

or other similar plan or arrangement) and, prior to the date that the

estate tax return is filed and on or before the last date prescribed by

law that the QDOT election may be made (no more than one year after the

time prescribed by law, including extensions, for filing the return),

the surviving spouse either actually transfers the property to a QDOT

or irrevocably assigns the property to a QDOT (see Sec. 20.2056A-4(b));

or

(iv) A plan or other arrangement that would have qualified for the

marital deduction but for section 2056(d)(1)(A), and whose payments are

not assignable or transferable to a QDOT, if the requirements of

Sec. 20.2056A-4(c) are met; and

(2) The executor makes a timely QDOT election under Sec. 20.2056A-

3.

(b) Marital deduction allowed if resident spouse becomes citizen.

For purposes of section 2056(d)(1) and paragraph (a) of this section,

the surviving spouse is treated as a citizen of the United States at

the date of the decedent's death if the requirements of section

2056(d)(4) are satisfied. For purposes of section 2056(d)(4)(A) and

notwithstanding Sec. 20.2056A-3(a), a return filed prior to the due

date (including extensions) is considered filed on the last date that

the return is required to be filed (including extensions), and a late

return filed at any time after the due date is considered filed on the

date that it is actually filed. A surviving spouse is a resident only

if the spouse is a resident under chapter 11 of the Internal Revenue

Code. See Sec. 20.0-1(b)(1). The status of the spouse as a resident

under section 7701(b) is not relevant to this determination except to

the extent that the income tax residency of the spouse is pertinent in

applying Sec. 20.0-1(b)(1).

(c) Special rules in the case of certain transfers subject to

estate and gift tax treaties. Under section 7815(d)(14) of the Omnibus

Budget Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat. 2106)

certain special rules apply in the case of transfers governed by

certain estate and gift tax treaties to which the United States is a

party. In the case of the estate of, or gift by, an individual who was

not a citizen or resident of the United States but was a resident of a

foreign country with which the United States has a tax treaty with

respect to estate, inheritance, or gift taxes, the amendments made by

section 5033 of the Technical and Miscellaneous Revenue Act of 1988

(Pub. L. 100-647, 102 Stat. 3342) do not apply to the extent such

amendments would be inconsistent with the provisions of such treaty

relating to estate, inheritance, or gift tax marital deductions. Under

this rule, the estate may choose either the statutory deduction under

section 2056A or the marital deduction allowed under the treaty. Thus,

the estate may not avail itself of both the marital deduction under the

treaty and the marital deduction under the QDOT provisions of section

2056A and chapter 11 of the Internal Revenue Code with respect to the

remainder of the marital property that is not deductible under the

treaty.

[[Page 43540]]

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

(a) In general. In order to qualify as a qualified domestic trust

(QDOT), the requirements of paragraphs (b) and (c) of this section, and

the requirements of Sec. 20.2056A-2T(d), must be satisfied. The

executor of the decedent's estate and the U.S. Trustee shall establish

in such manner as may be prescribed by the Commissioner on the estate

tax return and applicable instructions that these requirements have

been satisfied or are being complied with. In order to constitute a

QDOT, the trust must be maintained under the laws of a state of the

United States or the District of Columbia, and the administration of

the trust must be governed by the laws of a particular state of the

United States or the District of Columbia. For purposes of this

paragraph (a), a trust is maintained under the laws of a state of the

United States or the District of Columbia if the records of the trust

(or copies thereof) are kept in that state (or the District of

Columbia). The trust may be established pursuant to an instrument

executed under either the laws of a state of the United States or the

District of Columbia or pursuant to an instrument executed under the

laws of a foreign jurisdiction, such as a foreign will or trust,

provided that such foreign instrument designates the law of a

particular state of the United States or the District of Columbia as

governing the administration of the trust, and such designation is

effective under the law of the designated jurisdiction. In addition,

the trust must constitute an ordinary trust, as defined in

Sec. 301.7701-4(a) of this chapter, and not any other type of entity.

For purposes of this paragraph, a trust will not fail to constitute an

ordinary trust solely because of the nature of the assets transferred

to that trust, regardless of its classification under Secs. 301.7701-2

through 301.7701-4 of this chapter.

(b) Qualified marital interest requirements--(1) Property passing

to QDOT. If property passes from a decedent to a QDOT, the trust must

qualify for the federal estate tax marital deduction under section

2056(b)(5) (life estate with power of appointment), section 2056(b)(7)

(qualified terminable interest property, including joint and survivor

annuities under section 2056(b)(7)(C)), or section 2056(b)(8)

(surviving spouse is the only noncharitable beneficiary of a charitable

remainder trust), or meet the requirements of an estate trust as

defined in Sec. 20.2056(c)-2(b)(1)(i) through (iii).

(2) Property passing outright to spouse. If property does not pass

from a decedent to a QDOT, but passes to a noncitizen surviving spouse

in a form that meets the requirements for a marital deduction without

regard to section 2056(d)(1)(A), and that is not described in paragraph

(b)(1) of this section, the surviving spouse must either actually

transfer the property, or irrevocably assign the property, to a trust

(whether created by the decedent, the decedent's executor or by the

surviving spouse) that meets the requirements of paragraph (c) of this

section and the requirements of Sec. 20.2056A-2T(d) (pertaining,

respectively, to statutory requirements and regulatory requirements

imposed to ensure collection of tax) prior to the filing of the estate

tax return for the decedent's estate and on or before the last date

prescribed by law that the QDOT election may be made (see

Sec. 20.2056A-3(a)).

(3) Property passing under a nontransferable plan or arrangement.

If property does not pass from a decedent to a QDOT, but passes under a

plan or other arrangement that meets the requirements for a marital

deduction without regard to section 2056(d)(1)(A) and whose payments

are not assignable or transferable (see Sec. 20.2056A-4(c)), the

property is treated as meeting the requirements of this section, and

the requirements of Sec. 20.2056A-2T(d), if the requirements of

Sec. 20.2056A-4(c) are satisfied. In addition, where an annuity or

similar arrangement is described above except that it is assignable or

transferable, see Sec. 20.2056A-4(b)(7).

(c) Statutory requirements. The requirements of section

2056A(a)(1)(A) and (B) must be satisfied. For purposes of that section,

a domestic corporation is a corporation that is created or organized

under the laws of the United States or under the laws of any state of

the United States or the District of Columbia. The trustee required

under that section is referred to herein as the ``U.S. Trustee''.

(d) [Reserved]

Sec. 20.2056A-3 QDOT election.

(a) General rule. Subject to the time period prescribed in section

2056A(d), the election to treat a trust as a QDOT must be made on the

last federal estate tax return filed before the due date (including

extensions of time to file actually granted) or, if a timely return is

not filed, on the first federal estate tax return filed after the due

date. The election, once made, is irrevocable.

(b) No partial elections. An election to treat a trust as a QDOT

may not be made with respect to a specific portion of an entire trust

that would otherwise qualify for the marital deduction but for the

application of section 2056(d). However, if the trust is actually

severed in accordance with the applicable requirements of

Sec. 20.2056(b)-7(b)(2)(ii) prior to the due date for the election, a

QDOT election may be made for any one or more of the severed trusts.

(c) Protective elections. A protective election may be made to

treat a trust as a QDOT only if at the time the federal estate tax

return is filed, the executor of the decedent's estate reasonably

believes that there is a bona fide issue that concerns either the

residency or citizenship of the decedent, the citizenship of the

surviving spouse, whether an asset is includible in the decedent's

gross estate, or the amount or nature of the property the surviving

spouse is entitled to receive. For example, if at the time the federal

estate tax return is filed either the estate is involved in a bona fide

will contest, there is uncertainty regarding the inclusion in the gross

estate of an asset which, if includible, would be eligible for the QDOT

election, or there is uncertainty regarding the status of the decedent

as a resident alien or a nonresident alien for estate tax purposes, or

a similar uncertainty regarding the citizenship status of the surviving

spouse, a protective QDOT election may be made. The protective election

is in addition to, and is not in lieu of, the requirements set forth in

Sec. 20.2056A-4. The protective QDOT election must be made on a written

statement signed by the executor under penalties of perjury and must be

attached to the return described in paragraph (a) of this section, and

must identify the specific assets to which the protective election

refers and the specific basis for the protective election. However, the

protective election may otherwise be defined by means of a formula

(such as the minimum amount necessary to reduce the estate tax to

zero). Once made, the protective election is irrevocable. For example,

if a protective election is made because a bona fide question exists as

to the includibility of an asset in the decedent's gross estate and it

is later finally determined that the asset is so includible, the

protective election becomes effective with respect to the asset and

cannot thereafter be revoked.

(d) Manner of election. The QDOT election under paragraph (a) of

this section is made in the form and manner set forth in the decedent's

estate tax return, including applicable instructions.

[[Page 43541]]

Sec. 20.2056A-4 Procedures for conforming marital trusts and nontrust

marital transfers to the requirements of a qualified domestic trust.

(a) Marital trusts--(1) In general. If an interest in property

passes from the decedent to a trust for the benefit of a noncitizen

surviving spouse and if the trust otherwise qualifies for a marital

deduction but for the provisions of section 2056(d)(1)(A), the property

interest is treated as passing to the surviving spouse in a QDOT if the

trust is reformed, either in accordance with the terms of the

decedent's will or trust agreement or pursuant to a judicial

proceeding, to meet the requirements of a QDOT. For this purpose, the

requirements of a QDOT include all of the applicable requirements set

forth in Sec. 20.2056A-2, and the requirements of Sec. 20.2056A-2T(d).

A reformation pursuant to the terms of the decedent's will or trust

instrument must be completed by the time prescribed (including

extensions) for filing the decedent's estate tax return. For purposes

of this paragraph (a), a return filed prior to the due date (including

extensions) is considered filed on the last date that the return is

required to be filed (including extensions), and a late return filed at

any time after the due date is considered filed on the date that it is

actually filed.

(2) Judicial reformations. In general, a reformation pursuant to a

judicial proceeding is permitted under this section if the reformation

is commenced on or before the due date (determined with regard to

extensions actually granted) for filing the return of tax imposed by

chapter 11 of the Internal Revenue Code, regardless of the date that

the return is actually filed. The reformation (either pursuant to a

judicial proceeding or otherwise) must result in a trust that is

effective under local law. The reformed trust may be revocable by the

spouse, or otherwise be subject to the spouse's general power of

appointment, provided that no person (including the spouse) has the

power to amend the trust during the continued existence of the trust

such that it would no longer qualify as a QDOT. Prior to the time that

the judicial reformation is completed, the trust must be treated as a

QDOT. Thus, the trustee of the trust is responsible for filing the Form

706-QDT, paying any section 2056A estate tax that becomes due, and

filing the annual statement required under Sec. 20.2056A-2T(d)(3), if

applicable. Failure to comply with these requirements may cause the

trust to be subject to the anti-abuse rule under Sec. 20.2056A-

2T(d)(1)(iv). In addition, if the judicial reformation is terminated

prior to the time that the reformation is completed, the estate of the

decedent is required to pay the increased estate tax imposed on the

decedent's estate (plus interest and any applicable penalties) that

becomes due at the time of such termination as a result of the failure

of the trust to comply with section 2056(d). See section 6511 as to

applicable time periods for credit or refund of tax.

(3) Tolling of statutory assessment period. For the tolling of the

statute of limitations in the case of a judicial reformation, see

section 2056(d)(5)(B).

(b) Nontrust marital transfers--(1) In general. Under section

2056(d)(2)(B), if an interest in property passes outright from a

decedent to a noncitizen surviving spouse either by testamentary

bequest or devise, by operation of law, or pursuant to an annuity or

other similar plan or arrangement, and such property interest otherwise

qualifies for a marital deduction except that it does not pass in a

QDOT, solely for purposes of section 2056(d)(2)(A), the property is

treated as passing to the surviving spouse in a QDOT if the property

interest is either actually transferred to a QDOT before the estate tax

return is filed and on or before the last date prescribed by law that

the QDOT election may be made, or is assigned to a QDOT under an

enforceable and irrevocable written assignment made on or before the

date on which the return is filed and on or before the last date

prescribed by law that the QDOT election may be made. The transfer or

assignment of property to a QDOT may be made by the surviving spouse,

the surviving spouse's legal representative (if the surviving spouse is

incompetent), or the personal representative of the surviving spouse's

estate (if the surviving spouse has died). The QDOT to which the

property is transferred may be created by the decedent (during life or

by will), by the surviving spouse, or by the executor. For purposes of

section 2056(d)(2)(B), if no property other than the property passing

to the surviving spouse from the decedent is transferred to the QDOT,

the transferee QDOT need not be in a form such that the property

transferred to the QDOT would qualify for a marital deduction under

section 2056(a). However, if other property is or has been transferred

to the QDOT, 100 percent of the value of the transferee QDOT must

qualify for the marital deduction under section 2056. For example, if

the decedent, a U.S. citizen, bequeaths property to a trust that does

not satisfy the requirements of section 2056(b)(5) or (7), or to a

trust that does not qualify as an estate trust under Sec. 20.2056(c)-

2(b)(1)(i)-(iii), that trust cannot be used as a transferee QDOT by the

surviving spouse, since after that trust is fully funded the portion of

the value of the trust attributable to property bequeathed to the trust

by the decedent will not qualify for a marital deduction under section

2056. Similarly, if the decedent, a nonresident not a citizen of the

United States, bequeaths foreign situs assets to a trust created under

his will, the surviving spouse may not transfer U.S. situs assets

passing to the spouse outside of the will to that trust under this

paragraph. See Sec. 20.2056A-3(c) with respect to protective elections.

See Sec. 20.2056A-3(a) with respect to the time limitations for making

the QDOT election.

(2) Form of transfer or assignment. A transfer or assignment of

property to a QDOT must be in writing and otherwise be in accordance

with all local law requirements for such assignment or transfer. The

transfer or assignment may be of a specific asset or a group of assets,

or a fractional share of either, or may be of a pecuniary amount. A

transfer or assignment of less than an entire interest in an asset or a

group of assets may be expressed by means of a formula (such as the

minimum amount necessary to reduce the estate tax to zero). In the case

of a transfer, a copy of the trust instrument evidencing the transfer

must be submitted with the decedent's estate tax return. In the case of

an assignment, a copy of the assignment must be submitted with the

decedent's estate tax return.

(3) Assets eligible for transfer or assignment. If a transfer or

assignment is of a specific asset or group of assets, only assets

included in the decedent's gross estate and passing from the decedent

to the spouse (or the proceeds from the sale, exchange or conversion of

such assets) may be transferred or assigned to the QDOT. The noncitizen

surviving spouse may not transfer or assign to the QDOT property owned

by the surviving spouse at the time of the decedent's death in lieu of

property included in the decedent's gross estate that passes to the

spouse (or in lieu of the proceeds from the sale, exchange or

conversion of such includible assets). In addition, if only a portion

of an asset is includible in the decedent's gross estate, the spouse

may only transfer the portion that is so includible to the transferee

trust under this paragraph (b)(3).

(4) Pecuniary assignment--special rules. If the assignment is

expressed in the form of a pecuniary amount (such as a fixed dollar

amount or a formula designed to reduce the decedent's estate tax to

zero), the assignment must specify that--

[[Page 43542]]

(i) Assets actually transferred to the QDOT in satisfaction of the

assignment have an aggregate fair market value on the date of actual

transfer to the QDOT amounting to no less than the amount of the

pecuniary transfer or assignment; or

(ii) The assets actually transferred to the QDOT be fairly

representative of appreciation or depreciation in the value of all

property available for transfer to the QDOT between the valuation date

and the date of actual transfer to the QDOT, if the assignment is to be

satisfied by accounting for the assets on the basis of their fair

market value as of some date before the date of actual transfer to the

QDOT.

(5) Transfer tax treatment of transfer or assignment. Property

assigned or transferred to a QDOT pursuant to section 2056(d)(2)(B) is

treated as passing from the decedent to a QDOT solely for purposes of

section 2056(d)(2)(A). For all other purposes (e.g., income, gift,

estate, generation-skipping transfer tax, and section 1491 excise tax),

the surviving spouse is treated as the transferor of the property to

the QDOT. However, the spouse is not considered the transferor of

property to a QDOT if the transfer by the spouse constitutes a transfer

that satisfies the requirements of section 2518(c)(3). For a special

exception to the valuation rules of section 2702 in the case of a

transfer by the surviving spouse to a QDOT, see Sec. 25.2702-1(c)(8) of

this chapter.

(6) Period for completion of transfer. Property irrevocably

assigned but not actually transferred to the QDOT before the estate tax

return is filed must actually be conveyed and transferred to the QDOT

under applicable local law before the administration of the decedent's

estate is completed. If there is no administration of the decedent's

estate (because for example, none of the decedent's assets are subject

to probate under local law), the conveyance must be made on or before

the date that is one year after the due date (including extensions) for

filing the decedent's estate tax return. If an actual transfer to the

QDOT is not timely made, section 2056(d)(1)(A) applies and the marital

deduction is not allowed. The executor of the decedent's estate (or

other authorized legal representative) may request a private letter

ruling from the Internal Revenue Service requesting an extension of the

time for completing the conveyance or waiving the actual conveyance

under specified circumstances under Sec. 301.9100-1(a) of this chapter.

(7) Retirement accounts and annuities--(i) In general. An

assignment otherwise in compliance with this paragraph (b) of rights

under annuities or other similar arrangements that are assignable and

thus, are not described in paragraph (c) of this section, is treated as

a transfer of such property to the QDOT regardless of the method of

payment actually elected under such annuity or plan.

(ii) Individual retirement annuities. Individual retirement

annuities described in section 408(b) are not assignable pursuant to

section 408(b)(1) and thus, do not come within the purview of this

paragraph (b)(7). See the procedures provided in paragraph (c) of this

section.

(iii) Individual retirement accounts. Unless the terms of the

account provide otherwise, individual retirement accounts described in

section 408(a) are assignable and subject to the provisions of this

paragraph (b)(7). However, under paragraph (c) of this section, the

surviving spouse may treat an individual retirement account as

nonassignable and, therefore, eligible for the procedures in paragraph

(c) of this section if the spouse timely complies with the requirements

in paragraph (c) of this section.

(iv) Other effects of assignment. The provisions of this paragraph

(b)(7) apply solely for purposes of qualifying the annuity or account

under the rules of Sec. 20.2056A-2 and this section. See, for example,

section 408(d) and 4980A regarding the consequences of an assignment

for purposes other than this paragraph (b)(7).

(8) Protective assignment. A protective assignment of property to a

QDOT may be made only if, at the time the federal estate tax return is

filed, the executor of the decedent's estate reasonably believes that

there is a bona fide issue that concerns either the residency or

citizenship of the decedent, the citizenship of the surviving spouse,

whether all or a portion of an asset is includible in the decedent's

gross estate, or the amount or nature of the property the surviving

spouse is entitled to receive. For example, if at the time the federal

estate tax return is filed, either the estate is involved in a bona

fide will contest, there is uncertainty regarding the inclusion in the

gross estate of an asset which, if includible, would be eligible for

the QDOT election, or there is uncertainty regarding the status of the

decedent as a resident alien or a nonresident alien for estate tax

purposes, or a similar uncertainty regarding the citizenship status of

the surviving spouse, a protective assignment may be made. The

protective assignment must be made on a written statement signed by the

assignor under penalties of perjury on or before the date prescribed

under paragraph (b)(1) of this section, and must identify the specific

assets to which the assignment refers and the specific basis for the

protective assignment. However, the protective assignment may otherwise

be defined by means of a formula (such as the minimum amount necessary

to reduce the estate tax to zero). Once made, the protective assignment

cannot be revoked. For example, if a protective assignment is made

because a bona fide question exists as to the includibility of an asset

in the decedent's gross estate and it is later finally determined that

the asset is so includible, the protective assignment becomes effective

with respect to the asset and cannot thereafter be revoked. Protective

assignments are, in all events, subject to paragraph (b)(6) of this

section. A copy of the protective assignment must be submitted with the

decedent's estate tax return.

(c) Nonassignable annuities and other arrangements--(1) Definition

and general rule. For purposes of this section, a nonassignable annuity

or other arrangement means a plan, annuity, or other arrangement

(whether qualified or not qualified under part I of subchapter D of

chapter 1 of subtitle A of the Internal Revenue Code) that qualifies

for the marital deduction but for section 2056(d)(1)(A), and whose

payments are not assignable or transferable to the QDOT under either

federal law (see, e.g., section 401(a)(13)), state law, foreign law, or

the terms of the plan or arrangement itself. For purposes of this

paragraph (c), a surviving spouse's interest as beneficiary of an

individual retirement annuity described in section 408(b) is a

nonassignable annuity or other arrangement. See section 408(b)(1). For

purposes of this paragraph (c), a surviving spouse's interest as

beneficiary of an individual retirement account described in section

408(a), although assignable under that section, is considered to be a

nonassignable annuity or other arrangement eligible for the procedures

contained in this paragraph (c), at the option of the surviving spouse,

if the requirements of this paragraph are otherwise satisfied. See

paragraph (b)(7) of this section if the spouse elects to treat the

account as assignable. In the case of a plan, annuity, or other

arrangement which is not assignable or transferable (or is treated as

such), the property passing under the plan from the decedent is treated

as meeting the requirements Sec. 20.2056A-2, and the requirements of

Sec. 20.2056A-2T(d) (pertaining,

[[Page 43543]]

respectively, to general requirements, qualified marital interest

requirements, statutory requirements, and requirements to ensure

collection of the tax) if the requirements of either paragraph (c)(2)

or (3) of this section are satisfied. Thus, the property will be

treated as passing in the form of a QDOT, notwithstanding that the

spouse does not irrevocably transfer or assign the annuity or other

payment to the QDOT as provided in paragraph (b) of this section. The

Commissioner will prescribe by administrative guidance the extent, if

any, to which the provisions of this paragraph (c) apply to a rollover

from a qualified trust to an eligible retirement plan within the

meaning of section 402(c) or a distribution from an individual

retirement account or an individual retirement annuity that is paid

into an individual retirement account or an individual retirement

annuity within the meaning of section 408(d)(3).

(2) Agreement to remit section 2056A estate tax on corpus portion

of each annuity payment. The requirements of this paragraph (c)(2) are

satisfied if--

(i) The noncitizen surviving spouse agrees to pay on an annual

basis, as described in paragraph (c)(6)(i) of this section, the estate

tax imposed under section 2056A(b)(1) due on the corpus portion, as

defined in paragraph (c)(4) of this section, of each nonassignable

annuity or other payment received under the plan or arrangement.

However, for purposes of this paragraph (c)(2), if the financial

circumstances of the spouse are such that an amount equal to all or a

portion of the corpus portion of a nonassignable annuity payment

received by the spouse would be subject to a hardship exemption (as

defined in Sec. 20.2056A-5(c)) if paid from a QDOT, then all or a

corresponding part of the corpus portion will be exempt from the tax

payment requirement under this paragraph (c)(2);

(ii) The executor of the decedent's estate files with the estate

tax return the Information Statement described in paragraph (c)(5) of

this section;

(iii) The executor files with the estate tax return the Agreement

To Pay Section 2056A Estate Tax described in paragraph (c)(6) of this

section; and

(iv) The executor makes the election under Sec. 20.2056A-3 with

respect to the nonassignable annuity or other payment.

(3) Agreement to roll over corpus portion of annuity payment to

QDOT. The requirements of this paragraph (c)(3) are satisfied if--

(i) The noncitizen surviving spouse agrees to roll over and

transfer, within the time prescribed under paragraph (c)(7)(i) of this

section, the corpus portion of each annuity payment to a QDOT, whether

the QDOT is created by the decedent's will, the executor of the

decedent's estate, or the surviving spouse. However, for purposes of

this section, if the financial circumstances of the spouse are such

that an amount equal to all or a portion of the corpus portion of a

nonassignable annuity payment received by the spouse would be subject

to a hardship exemption (as defined in Sec. 20.2056A-5(c)) if paid from

a QDOT, then all or a corresponding part of the corpus portion will be

exempt from the rollover requirement under this paragraph (c)(3);

(ii) A QDOT for the benefit of the surviving spouse is established

prior to the date that the estate tax return is filed and on or prior

to the last date prescribed by law that the QDOT election may be made;

(iii) The executor of the decedent's estate files with the estate

tax return the Information Statement described in paragraph (c)(5) of

this section;

(iv) The executor files with the estate tax return the Agreement To

Roll Over Annuity Payments described in paragraph (c)(7) of this

section; and

(v) The executor makes the election under Sec. 20.2056A-3 with

respect to the nonassignable annuity or other payment. See

Sec. 20.2056A-5(c)(3)(iv)(A), regarding distributions from the QDOT

reimbursing the spouse for income taxes paid (either by actual payment

or withholding) by the spouse with respect to amounts transferred to

the QDOT pursuant to this paragraph (c)(3).

(4) Determination of corpus portion--(i) Corpus portion. For

purposes of this paragraph (c), the corpus portion of each

nonassignable annuity or other payment is the corpus amount of the

annual payment divided by the total annual payment.

(ii) Corpus amount. (A) The corpus amount of the annual payment is

determined in accordance with the following formula:

[GRAPHIC][TIFF OMITTED]TR22AU95.008

(B) The total present value of the annuity or other payment is the

present value of the nonassignable annuity or other payment as of the

date of the decedent's death, determined in accordance with the

interest rates and mortality data prescribed by section 7520. The

expected annuity term is the number of years that would be required for

the scheduled payments to exhaust a hypothetical fund equal to the

present value of the scheduled payments. This is determined by first

dividing the total present value of the payments by the annual payment.

From the quotient so obtained, the expected annuity term is derived by

identifying the term of years that corresponds to the annuity factor

equal to the quotient. This is determined by using column 1 of Table B,

for the applicable interest rate, contained in Publication 1457, Alpha

Volume. A copy of this publication may be purchased from the

Superintendent of Documents, United States Government Printing Office,

Washington, DC 20402. If the quotient obtained falls between two terms,

the longer term is used.

(5) Information Statement--(i) In general. In order for a

nonassignable annuity or other payment described in this paragraph (c)

to qualify under either paragraph (c) (2) or (3) of this section, the

Information Statement described in paragraph (c)(5)(ii) of this section

must be filed with the decedent's federal estate tax return. The

Information Statement must be signed under penalties of perjury by both

the executor of the decedent's estate and by the surviving spouse of

the decedent (or by the legal representative of the surviving spouse if

the surviving spouse is legally incompetent to sign the statement). The

Statement must contain all of the information prescribed by this

paragraph (c)(5).

(ii) Annuity source information--(A) Employment-related annuity. If

the nonassignable annuity or other payment is employment-related, the

following information must be provided--

(1) The name and address of the employer;

(2) The date of retirement or other separation from employment of

the decedent;

(3) The name and address of the pension fund, insurance company, or

other obligor that is paying the annuity (or similar payment); and

[[Page 43544]]

(4) The identification number, if any, that the obligor has

assigned to the annuity or other payment.

(B) Annuity not employment-related. If the nonassignable annuity or

other payment is not employment-related, the following information must

be provided--

(1) The name and address of the person or entity paying the

nonassignable annuity or other payment;

(2) The date of acquisition of the nonassignable annuity contract

by the decedent or by the decedent and the surviving spouse; and

(3) The identification number, if any, that the obligor has

assigned to the nonassignable annuity or other payment.

(iii) The total annuity amount payable each year. The total amount

payable annually under the nonassignable annuity or other arrangement,

including a description of whether the annuity is payable monthly,

quarterly, or at some other interval, and a description of any

scheduled changes in the annuity payout amount.

(iv) The duration of the annuity. A description of the term of the

nonassignable annuity or other payment in years, if it is determined by

a term certain, and the name, address, and birthdate of any measuring

life if the nonassignable annuity or other payment is determined by one

or more lives.

(v) The market interest rate under section 7520. The applicable

interest rate as determined under section 7520.

(vi) Determination of corpus portion of each payment (in accordance

with paragraph (c)(4) of this section). The following items are

required in order to determine the corpus portion of each payment--

(A) The present value of the nonassignable annuity or other payment

as of the decedent's death;

(B) The expected annuity term;

(C) The corpus amount of the annual annuity payments (paragraph

(c)(5)(vi)(A) of this section divided by paragraph (c)(5)(vi)(B) of

this section); and

(D) The corpus portion of the annual payments (paragraph

(c)(5)(vi)(C) of this section divided by the total amount payable

annually).

(vii) Recipient QDOT. In the case of an agreement to rollover under

paragraph (c)(3) of this section, the following must be provided--

(A) The name and address of the trustee of the QDOT who is the U.S.

Trustee; and

(B) The name and taxpayer identification number of the QDOT.

(viii) Certification statement. The executor of the decedent's

estate and the surviving spouse of the decedent (or the legal

representative of the surviving spouse if the surviving spouse is

legally incompetent to so certify) must each sign a Certification

Statement as follows:

Under penalties of perjury, I hereby certify that, to the best

of my knowledge and belief, the information reported in this

Information Statement is true, correct and complete.

(6) Agreement to pay section 2056A estate tax--(i) Payment of

section 2056A estate tax. The tax payable under paragraph (c)(2) of

this section is payable on an annual basis, commencing in the calendar

year following the calendar year of the receipt by the surviving spouse

of the spouse's first annuity payment. Form 706QDT and the payment are

due on April 15th of each year following the calendar year in which an

annuity payment is received except that, in the year of the deceased

spouse's death, the Form 706-QDT and the payment are not due prior to

the due date, including extensions, for filing the deceased spouse's

estate tax return, or if no return is filed, no later than 9 months

from the date of the deceased spouse's death; and, in the year of the

surviving spouse's death, the Form 706-QDT must be filed and the

payment made no later than 9 months from the date of the surviving

spouse's death. See Sec. 20.2056A-11 for extensions of time for filing

Form 706-QDT and paying the section 2056A estate tax.

(ii) Agreement. In order for a nonassignable annuity or other

payment described in this paragraph (c) to qualify under paragraph

(c)(2) of this section, the executor of the decedent's estate must file

with the estate tax return the following Agreement To Pay Section 2056A

Estate Tax, which must be signed by the surviving spouse of the

decedent (or by the surviving spouse's legal representative if the

surviving spouse is legally incompetent to sign the agreement):

I [ name ] hereby agree that I will report all annuity

payments received under the [name of plan or arrangement] on Form

706-QDT for the calendar year and remit, on an annual basis, to the

Internal Revenue Service the estate tax that is imposed under

section 2056A(b)(1) of the Internal Revenue Code on the corpus

portion of each annuity payment (as defined in Sec. 20.2056A-4(c)(4)

of the Estate Tax Regulations) received under the plan during the

calendar year. I also agree that Form 706-QDT is to be filed no

later than April 15th of the year following the calendar year in

which any annuity payments are received except that: in the case of

annuity payments received in the year of my spouse's death, Form

706-QDT and the payment shall not be due prior to the due date,

including extensions, for filing my spouse's estate tax return or,

if no return is filed, no later than 9 months from the date of my

spouse's death (except if I am granted an extension of time to file

Form 706-QDT under the provisions of Sec. 20.2056A-11); and in the

year of my death, the Form 706-QDT must be filed and the payment

made no later than the date my estate tax return is filed (or if no

return is filed, no later than 9 months from the date of my death).

I further agree that if I fail to timely file Form 706-QDT or to

timely pay the tax imposed on the corpus portion of any annuity

payment (determined after any extensions of time to pay granted to

me under the provisions of Sec. 20.2056A- 11), I may become

immediately liable to pay the amount of the tax determined by

application of section 2056A(b)(1) on the entire remaining present

value of the annuity, calculated as of the beginning of the year in

which the payment was received with respect to which I failed to

timely pay the tax or failed to timely file the return. However, I

may make an application for relief under Sec. 301.9100-1 of the

Procedure and Administration Regulations, from the consequences of

failing to timely file the Form 706-QDT or failing to timely pay the

tax on the corpus portion. [The following sentence is applicable

only in cases where the plan or arrangement is established and

administered by a person or an entity that is located outside of the

United States.] I agree, at the request of the District Director,

[or the Assistant Commissioner (International) in the case of a

surviving spouse of a nonresident noncitizen decedent or a surviving

spouse of a United States citizen who died domiciled outside the

United States] to enter into a security agreement to secure my

undertakings under this agreement.

(7) Agreement to roll over annuity payments--(i) Roll over of

corpus portion. Beginning in the calendar year of the receipt by the

surviving spouse of the spouse's first annuity payment, the corpus

portion of each annuity payment, as determined under paragraph (c)(4)

of this section, must, within 60 days of receipt, be transferred to a

QDOT. In addition, all annuity payments received during the calendar

year must be reported on Form 706-QDT no later than April 15th of the

year following the year in which the annuity payments are received,

except that in the year of the surviving spouse's death, the Form 706-

QDT must be filed no later than the date the estate tax return is filed

(or if no return is filed, no later than 9 months from the date of the

surviving spouse's death). See Sec. 20.2056A-11 for extensions of time

for filing Form 706-QDT.

(ii) Agreement. In order for a nonassignable annuity or other

payment described in this paragraph (c) to qualify under paragraph

(c)(3) of this section, the executor of the decedent's estate must file

with the estate tax return the following Agreement To Roll Over Annuity

Payments, which must be

[[Page 43545]]

signed by the surviving spouse of the decedent (or by the legal

representative of the surviving spouse if the surviving spouse is

legally incompetent to sign the agreement):

I [ name ] hereby agree that within 60 days of receipt of each

annuity payment paid under the [name of plan or arrangement], I will

transfer an amount equal to ______ percent (the corpus portion

determined under Sec. 20.2056A-4(c)(4) of the Estate Tax

Regulations) of each annuity payment to [identify the QDOT].

Further, I will report all annuity payments received during the

calendar year under the [name of plan or arrangement] on Form 706-

QDT including a schedule of transfers to the [identify the QDOT]. I

also agree that Form 706-QDT is to be filed no later than April 15th

of the year following the year in which any annuity payments are

received except that: in the case of annuity payments received in

the year of my spouse's death, Form 706-QDT shall not be due prior

to the due date, including extensions, for filing my spouse's estate

tax return, or, if no return is filed, no later than 9 months from

the date of my spouse's death (except if I am granted an extension

of time to file Form 706-QDT under the provisions of Sec. 20.2056A-

11); and in the year of my death, the Form 706-QDT must be filed no

later than the date my estate tax return is filed (or if no return

is filed, no later than 9 months from the date of my death), and

except if I am granted an extension of time to file Form 706-QDT

under the provisions of Sec. 20.2056A-11. I further agree that if I

fail to timely transfer any required amount with respect to any

annuity payment, or fail to timely file Form 706-QDT reporting the

transfers for any year, I may become immediately liable to pay the

amount of the tax determined by application of section 2056A(b)(1)

on the entire remaining present value of the annuity, calculated as

of the beginning of the year in which the payment was received with

respect to which I failed to make the timely transfer or timely file

a return. However, I may make an application for relief under

Sec. 301.9100-1 of the Procedure and Administration Regulations,

from the consequences of failing to timely file Form 706-QDT or

failing to timely transfer the corpus portion of any annuity payment

to the QDOT. [The following sentence is applicable only in cases

where the plan or arrangement is established and administered by a

person or an entity that is located outside of the United States.] I

agree, at the request of the District Director [or the Assistant

Commissioner (International) in the case of a surviving spouse of a

nonresident noncitizen decedent or a surviving spouse of a United

States citizen who died domiciled outside the United States] to

enter into a security agreement to secure my undertakings under this

agreement.

(d) Examples. The provisions of this section are illustrated by the

following examples. In each of the following examples the decedent, D,

a citizen of the United States, died after August 22, 1995, and D's

surviving spouse, S, is not a United States citizen at the time of D's

death.

Example 1. Transfer and assignment of probate and nonprobate

property to QDOT. (i) S is the beneficiary of the following probate

and nonprobate assets included in D's gross estate:

Pecuniary bequest under will............................... $400,000

Proceeds of life insurance................................. 200,000

D's interest in property owned jointly with S includible in

the gross estate under Sec. 2040(a)...................... 300,000

Devise of real property under will......................... 100,000

------------

Total.................................................. $1,000,000

(ii) Before the estate tax return for D's estate is filed and

before the date that the QDOT election must be made, S creates a

QDOT pursuant to which all income is payable to S for life and the

remainder is distributable to S's children. S retains a power of

appointment over the disposition of the remainder to ensure that S

does not make an immediate gift of the remainder of the trust. Also,

before the estate tax return is filed and before the date that the

QDOT election must be made, S transfers the life insurance proceeds

and the specifically devised real property to the QDOT. S decides

not to transfer the property that had been jointly owned to the

QDOT. Because S has not received distribution of the pecuniary

bequest before D's estate tax return is filed and before the date

that the QDOT election must be made, S irrevocably assigns the

interest in the pecuniary bequest to the QDOT. Assume that the

pecuniary bequest is in fact transferred by S to the QDOT before the

estate administration is concluded. D's executor makes a QDOT

election on the estate tax return for the $700,000 in property that

S has transferred and assigned to the QDOT. A marital deduction of

$700,000 is allowed to D's estate assuming the estate tax return is

filed and the QDOT election is made within the time limitation

prescribed in Sec. 20.2056A-3(a). No marital deduction is allowed

for the $300,000 interest in jointly-owned property not transferred

to the QDOT.

Example 2. Formula assignment. Under the terms of D's will, the

entire probate estate passes outright to S. Prior to the date D's

estate tax return is filed and before the date that the QDOT

election must be made, S establishes a QDOT and S executes an

irrevocable assignment in which S assigns to the QDOT, ``that

portion of the gross estate necessary to reduce the estate tax to

zero, taking into account all available credits and deductions.''

The assignment meets the requirements of paragraph (b) of this

section, assuming that the QDOT is funded by the time that

administration of D's estate is completed.

Example 3. Jointly owned property. At the time of D's death, D

and S hold real property as joint tenants with right of

survivorship. In accordance with section 2056(d)(1)(B), section

2040(a), and Sec. 20.2056A-8(a), 60 percent of the value of the

property is included in D's gross estate. S establishes a QDOT and,

prior to the date the estate tax return is filed and before the date

that the QDOT election must be made, S transfers a 60 percent

interest in the real property to the QDOT. The transfer satisfies

the requirements of paragraph (b) of this section.

Example 4. Computation of corpus portion of annuity payment. (i)

At the time of D's death, D is a participant in an employees'

pension plan described in section 401(a). On D's death, D's spouse

S, a resident of the United States, becomes entitled to receive a

survivor's annuity of $72,000 per year, payable monthly, for life.

At the time of D's death, S is age 60. Assume that under section

7520, the appropriate discount rate to be used for valuing annuities

in the case of this decedent is 9 percent. The annuity factor at 9

percent for a person age 60 is 8.3031. The adjustment factor at 9

percent for monthly payments is 1.0406. Accordingly, the right to

receive $72,000 a year on a monthly basis is equal to the right to

receive $74,923 ($72,000 x 1.0406) on an annual basis.

(ii) The corpus portion of each annuity payment received by S is

determined as follows. The first step is to determine the annuity

factor for the number of years that would be required to exhaust a

hypothetical fund that has a present value and a payout

corresponding to S's interest in the payments under the plan,

determined as follows:

(A) Present value of S's annuity: $74,923 x 8.3031 = $622,093

(B) Annuity Factor for Expected Annuity Term: $622,093/$74,923 =

8.3031

(iii) The second step is to determine the number of years that

would be required for S's annuity to exhaust a hypothetical fund of

$622,093. The term certain annuity factor of 8.3031 falls between

the annuity factors for 15 and 16 years in a 9 percent term certain

annuity table (Column 1 of Table B, Publication 1457 Alpha Volume

which may be purchased from the Superintendent of Documents, United

States Government Printing Office, Washington, DC 20402).

Accordingly, the expected annuity term is 16 years.

(iv) The third step is to determine the corpus amount by

dividing the expected term of 16 years into the present value of the

hypothetical fund as follows:

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

(v) In the fourth step, the corpus portion of each annuity

payment is determined by dividing the corpus amount of each annual

payment by the annual annuity payment as follows:

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

(vi) Accordingly, 52 percent of each payment to S is deemed to

be a distribution of corpus. A marital deduction is allowed for

$622,093, the present value of the annuity as of D's date of death,

if either: S agrees to roll over the corpus portion of each payment

to a QDOT and the executor files the Information Statement described

in paragraph (c)(5) of this section and the Roll Over Agreement

described in paragraph (c)(7) of this section; or S agrees to pay

the tax due on the corpus portion of each payment and the executor

files the Information Statement described in paragraph (c)(5) of

this section and the Payment Agreement described in paragraph (c)(6)

of this section.

[[Page 43546]]

Example 5. Transfer to QDOT subject to gift tax. D's will

bequeaths $700,000 outright to S. The bequest qualifies for a

marital deduction under section 2056(a) except that it does not pass

in a QDOT. S creates an irrevocable trust that meets the

requirements for a QDOT and transfers the $700,000 to the QDOT. The

QDOT instrument provides that S is entitled to all the income from

the QDOT payable at least annually and that, upon the death of S,

the property remaining in the QDOT is to be distributed to the

grandchildren of D and S in equal shares. The trust instrument

contains all other provisions required to qualify as a QDOT. On D's

estate tax return, D's executor makes a QDOT election under section

2056A(a)(3). Solely for purposes of the marital deduction, the

property is deemed to pass from D to the QDOT. D's estate is

entitled to a marital deduction for the $700,000 value of the

property passing from D to S. S's transfer of property to the QDOT

is treated as a gift of the remainder interest for gift tax purposes

because S's transfer creates a vested remainder interest in the

grandchildren of D and S. Accordingly, as of the date that S

transfers the property to the QDOT, a gift tax is imposed on the

present value of the remainder interest. See Sec. 25.2702-1(c)(8) of

this chapter exempting S's transfer from the special valuation rules

contained in section 2702. At S's death, S is treated as the

transferor of the property into the trust for estate tax and

generation-skipping transfer tax purposes. See, e.g., sections 2036

and 2652(a)(1). The trust is not eligible for a reverse QTIP

election by D's estate under section 2652(a)(3) because a QTIP

election cannot be made for the QDOT. This is so because the marital

deduction is allowed under section 2056(a) for the outright bequest

to the spouse and the spouse is then separately treated as the

transferor of the property to the QDOT.

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

(a) In general. An estate tax is imposed under section 2056A(b)(1)

on the occurrence of a taxable event, as defined in section

2056A(b)(9). The tax is generally equal to the amount of estate tax

that would have been imposed if the amount involved in the taxable

event had been included in the decedent's taxable estate and had not

been deductible under section 2056. See section 2056A(b)(3) and

paragraph (c) of this section for certain exceptions from taxable

events.

(b) Amounts subject to tax--(1) Distribution of principal during

the spouse's lifetime. If a taxable event occurs during the noncitizen

surviving spouse's lifetime, the amount on which the section 2056A

estate tax is imposed is the amount of money and the fair market value

of the property that is the subject of the distribution (including

property distributed from the trust pursuant to the exercise of a power

of appointment), including any amount withheld from the distribution by

the U.S. Trustee to pay the tax. If, however, the tax is not withheld

by the U.S. Trustee but is paid by the U.S. Trustee out of other assets

of the QDOT, an amount equal to the tax so paid is treated as an

additional distribution to the spouse in the year that the tax is paid.

(2) Death of surviving spouse. If a taxable event occurs as a

result of the death of the surviving spouse, the amount subject to tax

is the fair market value of the trust assets on the date of the

spouse's death (or alternate valuation date if applicable). See also

section 2032A. Any corpus portion amounts, within the meaning of

Sec. 20.2056A-4(c)(4)(i), remaining in a QDOT upon the surviving

spouse's death, are subject to tax under section 2056A(b)(1)(B), as

well as any residual payments resulting from a nonassignable plan or

arrangement that, upon the surviving spouse's death, are payable to the

spouse's estate or to successor beneficiaries.

(3) Trust ceases to qualify as QDOT. If a taxable event occurs as a

result of the trust ceasing to qualify as a QDOT (for example, the

trust ceases to have at least one U.S. Trustee), the amount subject to

tax is the fair market value of the trust assets on the date of

disqualification.

(c) Distributions and dispositions not subject to tax--(1)

Distributions of principal on account of hardship. Section

2056A(b)(3)(B) provides an exemption from the section 2056A estate tax

for distributions to the surviving spouse on account of hardship. A

distribution of principal is treated as made on account of hardship if

the distribution is made to the spouse from the QDOT in response to an

immediate and substantial financial need relating to the spouse's

health, maintenance, education, or support, or the health, maintenance,

education, or support of any person that the surviving spouse is

legally obligated to support. A distribution is not treated as made on

account of hardship if the amount distributed may be obtained from

other sources that are reasonably available to the surviving spouse;

e.g., the sale by the surviving spouse of personally owned, publicly

traded stock or the cashing in of a certificate of deposit owned by the

surviving spouse. Assets such as closely held business interests, real

estate and tangible personalty are not considered sources that are

reasonably available to the surviving spouse. Although a hardship

distribution of principal is exempt from the section 2056A estate tax,

it must be reported on Form 706-QDT even if it is the only distribution

that occurred during the filing period. See Sec. 20.2056A-11 regarding

filing requirements for Form 706-QDT.

(2) Distributions of income to the surviving spouse. Section

2056A(b)(3)(A) provides an exemption from the section 2056A estate tax

for distributions of income to the surviving spouse. In general, for

purposes of section 2056A(b)(3)(A), the term income has the same

meaning as is provided in section 643(b), except that income does not

include capital gains. In addition, income does not include any other

item that would be allocated to corpus under applicable local law

governing the administration of trusts irrespective of any specific

trust provision to the contrary. In cases where there is no specific

statutory or case law regarding the allocation of such items under the

law governing the administration of the QDOT, the allocation under this

paragraph (c)(2) will be governed by general principles of law

(including but not limited to any uniform state acts, such as the

Uniform Principal and Income Act, or any Restatements of applicable

law). Further, except as provided in this paragraph (c)(2) or in

administrative guidance published by the Internal Revenue Service,

income does not include items constituting income in respect of a

decedent (IRD) under section 691. However, in cases where a QDOT is

designated by the decedent as a beneficiary of a pension or profit

sharing plan described in section 401(a) or an individual retirement

account or annuity described in section 408, the proceeds of which are

payable to the QDOT in the form of an annuity, any payments received by

the QDOT may be allocated between income and corpus using the method

prescribed under Sec. 20.2056A-4(c) for determining the corpus and

income portion of an annuity payment.

(3) Certain miscellaneous distributions and dispositions. Certain

miscellaneous distributions and dispositions of trust assets are exempt

from the section 2056A estate tax, including but not limited to the

following--

(i) Payments for ordinary and necessary expenses of the QDOT

(including bond premiums and letter of credit fees);

(ii) Payments to applicable governmental authorities for income tax

or any other applicable tax imposed on the QDOT (other than a payment

of the section 2056A estate tax due on the occurrence of a taxable

event as described in paragraph (b) of this section);

[[Page 43547]]

(iii) Dispositions of trust assets by the trustees (such as sales,

exchanges, or pledging as collateral) for full and adequate

consideration in money or money's worth; and

(iv) Pursuant to section 2056A(b)(15), amounts paid from the QDOT

to reimburse the surviving spouse for any tax imposed on the spouse

under Subtitle A of the Internal Revenue Code on any item of income of

the QDOT to which the surviving spouse is not entitled under the terms

of the trust. Such distributions include (but are not limited to)

amounts paid from the QDOT to reimburse the spouse for income taxes

paid by the spouse (either by actual payment or through withholding)

with respect to amounts received from a nonassignable annuity or other

arrangement that are transferred by the spouse to a QDOT pursuant to

Sec. 20.2056A- 4(c)(3); and income taxes paid by the spouse (either by

actual payment or through withholding) with respect to amounts received

in a lump sum distribution from a qualified plan if the lump sum

distribution is assigned by the surviving spouse to a QDOT. For

purposes of this paragraph (c)(3)(iv), the amount of attributable tax

eligible for reimbursement is the difference between the actual income

tax liability of the spouse and the spouse's income tax liability

determined as if the item had not been included in the spouse's gross

income in the applicable taxable year.

Sec. 20.2056A-6 Amount of tax.

(a) Definition of tax. Section 2056A(b)(2) provides for the

computation of the section 2056A estate tax. For purposes of sections

2056A(b)(2)(A) (i) and (ii), in determining the tax that would have

been imposed under section 2001 on the estate of the first decedent,

the rates in effect on the date of the first decedent's death are used.

For this purpose, the provisions of section 2001(c)(2) (pertaining to

phaseout of graduated rates and unified credit) apply. In addition, for

purposes of sections 2056A(b)(2)(A) (i) and (ii), the tax which would

have been imposed by section 2001 on the estate of the decedent means

the net tax determined under section 2001 or 2101, as the case may be,

after allowance of any allowable credits, including the unified credit

allowable under section 2010, the credit for state death taxes under

section 2011, the credit for tax on prior transfers under section 2013,

and the credit for foreign death taxes under section 2014. See

paragraph (b)(4) of this section regarding the application of the

credits under sections 2011 and 2014. In the case of a decedent

nonresident not a citizen of the United States, the applicable credits

are determined under section 2102. The estate tax (net of any

applicable credits) imposed under section 2056A(b)(1) constitutes an

estate tax for purposes of section 691(c)(2)(A).

(b) Benefits allowed in determining amount of section 2056A estate

tax--(1) General rule. Section 2056A(b)(10) provides for the allowance

of certain benefits in computing the section 2056A estate tax. Except

as provided in this section, the rules of each of the credit, deduction

and deferral provisions, as provided in the Internal Revenue Code must

be complied with.

(2) Treatment as resident. For purposes of section 2056A(b)(10)(A),

a noncitizen spouse is treated as a resident of the United States for

purposes of determining whether the QDOT property is includible in the

spouse's gross estate under chapter 11 of the Internal Revenue Code,

and for purposes of determining whether any of the credits, deductions

or deferral provisions are allowable with respect to the QDOT property

to the estate of the spouse.

(3) Special rule in the case of trusts described in section

2056(b)(8). In the case of a QDOT in which the spouse's interest

qualifies for a marital deduction under section 2056(b)(8), the

provisions of section 2056A(b)(10)(A) apply in determining the

allowance of a charitable deduction in computing the section 2056A

estate tax, notwithstanding that the QDOT is not includible in the

spouse's gross estate.

(4) Credit for state and foreign death taxes. If the assets of the

QDOT are included in the surviving spouse's gross estate for federal

estate tax purposes, or would have been so includible if the spouse had

been a United States resident, and state or foreign death taxes are

paid by the spouse's estate with respect to the QDOT, the taxes paid by

the spouse's estate with respect to the QDOT are creditable, to the

extent allowable under section 2011 or 2014, as applicable, in

computing the section 2056A estate tax. In addition, state or foreign

death taxes previously paid by the decedent/transferor's estate are

also creditable in computing the section 2056A estate tax to the extent

allowable under sections 2011 and 2014. Specifically, the tax that

would have been imposed on the decedent's estate if the taxable estate

had been increased by the value of the QDOT assets on the spouse's

death plus the amount involved in prior taxable events (section

2056A(b)(2)(A)(i)), is determined after allowance of a credit equal to

the lesser of the state or foreign death tax previously paid by the

decedent's estate, or the amount prescribed under section 2011(b) or

2014(b) computed based on a taxable estate increased by such amounts.

Similarly, the tax that would have been imposed on the decedent's

estate if the taxable estate had been increased only by the amount

involved in prior taxable events (section 2056A(b)(2)(A)(ii)) is

determined after allowance of a credit equal to the lesser of the state

or foreign death tax previously paid by the decedent's estate, or the

amount prescribed under section 2011(b) or 2014(b) computed based on a

taxable estate increased by the amount involved in such prior taxable

events. See paragraph (d), Example 2, of this section.

(5) Alternate valuation and special use valuation--(i) In general.

In order to claim the benefits of alternate valuation under section

2032, or special use valuation under section 2032A, for purposes of

computing the section 2056A estate tax, an election must be made on the

Form 706-QDT that is filed with respect to the balance remaining in the

QDOT upon the death of the surviving spouse. In addition, the separate

requirements for making the section 2032 and/or section 2032A elections

under those sections and the regulations thereunder must be complied

with except that, for this purpose, the surviving spouse is treated as

a resident of the United States regardless of the surviving spouse's

actual residency status. Solely for purposes of this paragraph (b)(5),

the citizenship of the first decedent is immaterial.

(ii) Alternate valuation. For purposes of the alternate valuation

election under section 2032, the election may not be made unless the

election decreases both the value of the property remaining in the QDOT

upon the death of the surviving spouse and the net amount of section

2056A estate tax due. Once made, the election is irrevocable.

(iii) Special use valuation. For purposes of section 2032A, the

Designated Filer (in the case of multiple QDOTs) or the U.S. Trustee

may elect to value certain farm and closely held business real property

at its farm or business use value, rather than its fair market value,

if all of the requirements under section 2032A and the applicable

regulations are met, except that, for this purpose, the surviving

spouse is treated as a resident of the United States regardless of the

spouse's actual residency status. The total value of property valued

under section 2032A in the QDOT cannot be decreased from fair market

value by more than $750,000.

[[Page 43548]]

(c) Miscellaneous rules. See sections 2056A(b)(2)(B)(i) and

2056A(b)(2)(C) for special rules regarding the appropriate rate of tax.

See section 2056A(b)(2)(B)(ii) for provisions regarding a credit or

refund with respect to the section 2056A estate tax.

(d) Examples. The rules of this section are illustrated by the

following examples.

Example 1. (i) D, a United States citizen, dies in 1995 a resident

of State X, with a gross estate of $1,200,000. Under D's will, a

pecuniary bequest of $700,000 passes to a QDOT for the benefit of D's

spouse S, who is a resident but not a citizen of the United States. D's

estate tax is computed as follows:

Gross estate.......................... $1,200,000 ...............

Marital Deduction..................... (700,000) ...............

-----------------

Taxable Estate.................... $500,000 ...............

Gross Tax............................. ............... $155,800

Less: Unified Credit.................. ............... (155,800)

----------------

Net Tax........................... ............... 0

(ii) S dies in 1997 at which time S is still a resident of the

United States and the value of the assets of the QDOT is $700,000.

Assuming there were no taxable events during S's lifetime with respect

to the QDOT, the estate tax imposed under section 2056A(b)(1)(B) is

$235,000, computed as follows:

D's actual taxable estate................. $500,000 ..............

QDOT property............................. 700,000 ..............

--------------

Total................................. $1,200,000 ..............

Gross Tax................................. ............ $427,800

Less: Unified Credit...................... ............ (192,800)

---------------

Net Tax............................... ............ Sec. 235,000

Less: Tax that would have been imposed on

D's actual taxable estate of $500,000.... ............ 0

---------------

Section 2056A Estate Tax.................. ............ $235,000

Example 2. (i) The facts are the same as in Example 1, except that

D's gross estate was $2,000,000 and D's estate paid $70,000 in state

death taxes to State X. D's estate tax is computed as follows:

Gross Estate.................. $2,000,000 ........ ..............

Marital Deduction............. (700,000) ........ ..............

----------------

Taxable Estate............ $1,300,000 ........ ..............

Gross Tax..................... .............. ........ $469,800

Less: Unified Credit.......... .............. 192,800 ..............

State Death Tax Credit

Limitation (lesser of $51,600

or $70,000 tax paid)......... .............. 51,600 (244,400)

---------------------------

Estate Tax................ .............. ........ $225,400

(ii) S dies in 1997 at which time S is still a resident of the

United States and the value of the assets of the QDOT is $800,000. S's

estate pays $40,000 in State X death taxes with respect to the

inclusion of the QDOT in S's gross estate for state death tax purposes.

Assuming there were no taxable events during S's lifetime with respect

to the QDOT, the estate tax imposed under section 2056A(b)(1)(B) is

$304,800 computed as follows:

D's Actual Taxable Estate................. $1,300,000 ..............

QDOT Property............................. 800,000 ..............

--------------

Total................................. $2,100,000 ..............

Gross Tax................................. ............ $829,800

Less: Unified Credit...................... ............ (192,800)

---------------

Pre-2011 section 2056A estate tax..... ............ $637,000

(A) State Death Tax Credit Computation:

(1) State death tax paid by S's estate

with respect to the QDOT [$40,000]

plus state death tax previously paid

by D's estate [$70,000] = $110,000... ............ ..............

(2) Credit limit under section 2011(b)

(based on D's adjusted taxable estate

of $2,040,000 under sections

2056A(b)(2)(A) and 2011(b)) =

$106,800............................. ............ ..............

[[Page 43549]]

(B) State death tax credit allowable

against section 2056A estate tax (lesser

of paragraph (ii)(A)(1) or (2) of this

Example 2 ............ (106,800)

---------------

Net Tax........................... ............ $530,200

Less: Tax that would have been imposed on

D's taxable estate of $1,300,000......... ............ 225,400

---------------

Section 2056A Estate Tax.............. ............ $304,800

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

(a) Property subject to QDOT election. Section 2056(d)(3) provides

special rules for computing the section 2013 credit allowed with

respect to property subject to a QDOT election. In computing the credit

under section 2013, the amount of the credit is determined under

section 2013 and the regulations thereunder, except that--

(1) The first limitation as described in section 2013(b) and

Sec. 20.2013-2 is the amount of the estate tax imposed under section

2056A(b)(1)(A), with respect to distributions during the spouse's life,

and under section 2056A(b)(1)(B), with respect to the value of the QDOT

assets on the spouse's death;

(2) In computing the second limitation as described in section

2013(c) and Sec. 20.2013-3, the value of the property transferred to

the decedent (as defined in section 2013(d) and Sec. 20.2013-4) is

deemed to be the value of the QDOT assets on the date of death of the

surviving spouse. The value as so determined is not reduced by the

section 2056A estate tax imposed at the time of the spouse's death; and

(3) The amount of the credit is determined without regard to the

percentage limitations contained in section 2013(a).

(b) Property not subject to QDOT election. If property includible

in a decedent's gross estate passes to a noncitizen surviving spouse

(the transferee) and no deduction is allowed to the decedent's estate

for that interest in property under section 2056(a) solely because the

requirements of section 2056(d)(2) are not satisfied, and the

transferee spouse dies with an estate that is subject to tax under

section 2001 or 2101, as the case may be, any credit for tax on prior

transfers allowable to the estate of the transferee spouse under

section 2013 with respect to such interest in property is determined in

accordance with the rules of section 2013 and the regulations

thereunder, except that the amount of the credit is determined without

regard to the percentage limitations contained in section 2013(a).

(c) Example. The application of this section may be illustrated by

the following example:

Example. The facts are the same as in Sec. 20.2056A-6, Example

2(ii). D, a United States citizen, dies in 1994, a resident of State

X, with a gross estate of $2,000,000. Under D's will, a pecuniary

bequest of $700,000 passes to a QDOT for the benefit of D's spouse

S, who is a resident but not a citizen of the United States. S dies

in 1997 at which time S is still a resident of the United States and

the value of the assets of the QDOT is $800,000. There were no

taxable events during S's lifetime. An estate tax of $304,800 is

imposed under section 2056A(b)(1)(B). S's taxable estate, including

the value of the QDOT ($800,000), is $1,500,000.

(i) Under paragraph (a)(1) of this section, the first limitation

for purposes of section 2013(b) is $304,800, the amount of the

section 2056A estate tax.

(ii) Under paragraph (a)(2) of this section, the second

limitation for purposes of section 2013(c) is computed as follows:

(A) S's net estate tax payable under Sec. 20.2013-3(a)(1), as

modified under paragraph (a)(2) of this section, is computed as

follows:

Taxable estate................................ ........... $1,500,000

Gross estate tax.............................. ........... 555,800

Less: Unified credit.......................... $192,800 ...........

Credit for state death taxes.................. 64,400 257,200

-------------------------

Pre-2013 net estate tax payable........... ........... $298,600

(B) S's net estate tax payable under Sec. 20.2013-3(a)(2), as

modified under paragraph (a)(2) of this section, is computed as

follows:

Taxable estate................................ ........... $700,000

Gross estate tax.............................. ........... 229,800

Less: Unified credit.......................... $192,800 ...........

Credit for state death taxes.................. 18,000 210,800

-------------------------

Net tax payable........................... ........... $19,000

(C) Second Limitation:

Paragraph (ii)(A) of this Example......... $298,600 ...........

Less: Paragraph (ii)(B) of this Example... 19,000

--------------

$279,600

(iii) Credit for tax on prior transfers = $279,600 (lesser of

paragraphs (i) or (ii) of this Example.

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

(a) Inclusion in gross estate--(1) General rule. If property is

held by the decedent and the surviving spouse of the decedent as joint

tenants with right of survivorship, or as tenants by the entirety, and

the surviving spouse is not a United States citizen (or treated as a

United States citizen) at the time of the decedent's death, the

property is subject to inclusion in the decedent's gross estate in

accordance with the rules of section 2040(a) (general rule for

includibility of joint interests), and section 2040(b) (special rule

for includibility of certain joint interests of husbands and wives)

does not apply. Accordingly, the rules contained in section 2040(a) and

Sec. 20.2040-1 govern the extent to which such joint interests are

includible in the gross estate of a decedent who was a citizen or

resident of the United States. Under Sec. 20.2040-1(a)(2), the entire

value of jointly held property is included in the decedent's gross

estate unless the executor submits facts sufficient to show that

property was not entirely acquired with consideration furnished by the

decedent, or was acquired by the decedent and the other joint owner by

gift, bequest, devise or inheritance. If the decedent is a nonresident

not a citizen of the United States, the rules of this paragraph (a)(1)

apply pursuant to sections 2103, 2031, 2040(a), and 2056(d)(1)(B).

(2) Consideration furnished by surviving spouse. For purposes of

applying section 2040(a), in determining the amount of consideration

furnished by the surviving spouse, any consideration furnished by the

decedent with respect to the property before July 14, 1988, is treated

as consideration furnished by the surviving spouse to the

[[Page 43550]]

extent that the consideration was treated as a gift to the spouse under

section 2511, or to the extent that the decedent elected to treat the

transfer as a gift to the spouse under section 2515 (to the extent

applicable). For purposes of determining whether the consideration was

a gift by the decedent under section 2511, it is presumed that the

decedent was a citizen of the United States at the time the

consideration was so furnished to the spouse. The special rule of this

paragraph (a)(2) is applicable only if the donor spouse predeceases the

donee spouse and not if the donee spouse predeceases the donor spouse.

In cases where the donee spouse predeceases the donor spouse, any

portion of the consideration treated as a gift to the donee spouse/

decedent on the creation of the tenancy (or subsequently thereafter),

regardless of the date the tenancy was created, is not treated as

consideration furnished by the donee spouse/decedent for purposes of

section 2040(a).

(3) Amount allowed to be transferred to QDOT. If, as a result of

the application of the rules described above, only a portion of the

value of a jointly-held property interest is includible in a decedent's

gross estate, only that portion that is so includible may be

transferred to a QDOT under section 2056(d)(2). See Sec. 20.2056A-

4(b)(1) and (d), Example 3.

(b) Surviving spouse becomes citizen. Paragraph (a) of this section

does not apply if the surviving spouse meets the requirements of

section 2056(d)(4). For the definition of resident in applying section

2056(d)(4), see Sec. 20.0-1(b).

(c) Examples. The provisions of this section are illustrated by the

following examples:

Example 1. In 1987, D, a United States citizen, purchases real

property and takes title in the names of D and S, D's spouse (a

noncitizen, but a United States resident), as joint tenants with

right of survivorship. In accordance with Sec. 25.2511-1(h)(5) of

this chapter, one-half of the value of the property is a gift to S.

D dies in 1995. Because S is not a United States citizen, the

provisions of section 2040(a) are determinative of the extent to

which the real property is includible in D's gross estate. Because

the joint tenancy was established before July 14, 1988, and under

the applicable provisions of the Internal Revenue Code and

regulations the transfer was treated as a gift of one-half of the

property, one-half of the value of the property is deemed

attributable to consideration furnished by S for purposes of section

2040(a). Accordingly, only one-half of the value of the property is

includible in D's gross estate under section 2040(a).

Example 2. The facts are the same as in Example 1, except that S

dies in 1995 survived by D who is not a citizen of the United

States. For purposes of applying section 2040(a), D's gift to S on

the creation of the tenancy is not treated as consideration

furnished by S toward the acquisition of the property. Accordingly,

since S made no other contributions with respect to the property, no

portion of the property is includible in S's gross estate.

Example 3. The facts are the same as in Example 1, except that D

and S purchase real property in 1990 making the down payment with

funds from a joint bank account. All subsequent mortgage payments

and improvements are paid from the joint bank account. The only

funds deposited in the joint bank account are the earnings of D and

S. It is established that D earned approximately 60% of the funds

and S earned approximately 40% of the funds. D dies in 1995. The

establishment of S's contribution to the joint bank account is

sufficient to show that S contributed 40% of the consideration for

the property. Thus, under paragraph Sec. 20.2040-1(a)(2), 60% of the

value of the property is includible in D's gross estate.

Sec. 20.2056A-9 Designated Filer.

Section 2056A(b)(2)(C) provides special rules where more than one

QDOT is established with respect to a decedent. The designation of a

person responsible for filing a return under section 2056A(b)(2)(C)(i)

(the Designated Filer) must be made on the decedent's federal estate

tax return, or on the first Form 706-QDT that is due and is filed by

its prescribed date, including extensions. The Designated Filer must be

a U.S. Trustee. If the U.S. Trustee is an individual, that individual

must have a tax home (as defined in section 911(d)(3)) in the United

States. At least sixty days before the due date for filing the tax

returns for all of the QDOTs, the U.S. Trustee(s) of each of the QDOTs

must provide to the Designated Filer all of the necessary information

relating to distributions from their respective QDOTs. The section

2056A estate tax due from each QDOT is allocated on a pro rata basis

(based on the ratio of the amount of each respective distribution

constituting a taxable event to the amount of all such distributions),

unless a different allocation is required under the terms of the

governing instrument or under local law. Unless the decedent has

provided for a successor Designated Filer, if the Designated Filer

ceases to qualify as a U.S. Trustee, or otherwise becomes unable to

serve as the Designated Filer, the remaining trustees of each QDOT must

select a qualifying successor Designated Filer (who is also a U.S.

Trustee) prior to the due date for the filing of Form 706-QDT

(including extensions). The selection is to be indicated on the Form

706-QDT. Failure to select a successor Designated Filer will result in

the application of section 2056A(b)(2)(C).

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

established.

(a) Section 2056A estate tax no longer imposed under certain

circumstances. Section 2056A(b)(12) provides that a QDOT is no longer

subject to the imposition of the section 2056A estate tax if the

surviving spouse becomes a citizen of the United States and the

following conditions are satisfied--

(1) The spouse either was a United States resident (for the

definition of resident for this purpose, see Sec. 20.2056A-1(b)) at all

times after the death of the decedent and before becoming a United

States citizen, or no taxable distributions are made from the QDOT

before the spouse becomes a United States citizen (regardless of the

residency status of the spouse); and

(2) The U.S. Trustee(s) of the QDOT notifies the Internal Revenue

Service and certifies in writing that the surviving spouse has become a

United States citizen. Notice is to be made by filing a final Form 706-

QDT on or before April 15th of the calendar year following the year in

which the surviving spouse becomes a United States citizen, unless an

extension of time for filing is granted under section 6081.

(b) Special election by spouse. If the surviving spouse becomes a

United States citizen and the spouse is not a United States resident at

all times after the death of the decedent and before becoming a United

States citizen, and a tax was previously imposed under section

2056A(b)(1)(A) with respect to any distribution from the QDOT before

the surviving spouse becomes a United States citizen, the estate tax

imposed under section 2056A(b)(1) does not apply to distributions after

the spouse becomes a citizen if--

(1) The spouse elects to treat any taxable distribution from the

QDOT prior to the spouse's election as a taxable gift made by the

spouse for purposes of section 2001(b)(1)(B) (referring to adjusted

taxable gifts), and for purposes of determining the amount of the tax

imposed by section 2501 on actual taxable gifts made by the spouse

during the year in which the spouse becomes a citizen or in any

subsequent year;

(2) The spouse elects to treat any previous reduction in the

section 2056A estate tax by reason of the decedent's unified credit

(under either section 2010 or section 2102(c)) as a reduction in the

spouse's unified credit under section 2505 for purposes of determining

the amount of the credit allowable with

[[Page 43551]]

respect to taxable gifts made by the surviving spouse during the

taxable year in which the spouse becomes a citizen, or in any

subsequent year; and

(3) The elections referred to in this paragraph (b) are made by

timely filing a Form 706-QDT on or before April 15th of the year

following the year in which the surviving spouse becomes a citizen

(unless an extension of time for filing is granted under section 6081)

and attaching notification of the election to the return.

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

estate tax.

(a) Distributions during surviving spouse's life. Section

2056A(b)(5)(A) provides the due date for payment of the section 2056A

estate tax imposed on distributions during the spouse's lifetime. An

extension of not more than 6 months may be obtained for the filing of

Form 706-QDT under section 6081(a) if the conditions specified therein

are satisfied. See also Sec. 20.2056A- 5(c)(1) regarding the

requirements for filing a Form 706-QDT in the case of a distribution to

the surviving spouse on account of hardship, and Sec. 20.2056A-2T(d)(3)

regarding the requirements for filing Form 706-QDT in the case of the

required annual statement.

(b) Tax at death of surviving spouse. Section 2056A(b)(5)(B)

provides the due date for payment of the section 2056A estate tax

imposed on the death of the spouse under section 2056A(b)(1)(B). An

extension of not more than 6 months may be obtained for the filing of

the Form 706-QDT under section 6081(a), if the conditions specified

therein are satisfied. The obtaining of an extension of time to file

under section 6081(a) does not extend the time to pay the section 2056A

estate tax as prescribed under section 2056A(b)(5)(B).

(c) Extension of time for paying section 2056A estate tax--(1)

Extension of time for paying tax under section 6161(a)(2). Pursuant to

sections 2056A(b)(10)(C) and 6161(a)(2), upon a showing of reasonable

cause, an extension of time for a reasonable period beyond the due date

may be granted to pay any part of the estate tax that is imposed upon

the surviving spouse's death under section 2056A(b)(1)(B) and shown on

the final Form 706-QDT, or any part of any installments of such tax

payable under section 6166 (including any part of a deficiency prorated

to any installment under such section). The extension may not exceed 10

years from the date prescribed for payment of the tax (or in the case

of an installment or part of a deficiency prorated to an installment,

if later, not beyond the date that is 12 months after the due date for

the last installment). Such extension may be granted by the district

director or the director of the service center where the Form 706-QDT

is filed.

(2) Extension of time for paying tax under section 6161(a)(1). An

extension of time beyond the due date to pay any part of the estate tax

imposed on lifetime distributions under section 2056A(b)(1)(A), or

imposed at the death of the surviving spouse under section

2056A(b)(1)(B), may be granted for a reasonable period of time, not to

exceed 6 months (12 months in the case of the estate tax imposed under

section 2056A(b)(1)(B) at the surviving spouse's death), by the

district director or the director of the service center where the Form

706-QDT is filed.

(d) Liability for tax. Under section 2056A(b)(6), each trustee (and

not solely the U.S. Trustee(s)) of a QDOT is personally liable for the

amount of the estate tax imposed in the case of any taxable event under

section 2056A(b)(1). In the case of multiple QDOTs with respect to the

same decedent, each trustee of a QDOT is personally liable for the

amount of the section 2056A estate tax imposed on any taxable event

with respect to that trustee's QDOT, but is not personally liable for

tax imposed with respect to taxable events involving QDOTs of which

that person is not a trustee. However, the assets of any QDOT are

subject to collection by the Internal Revenue Service for any tax

resulting from a taxable event with respect to any other QDOT

established with respect to the same decedent. The trustee may also be

personally liable as a withholding agent under section 1461 or other

applicable provisions of the Internal Revenue Code.

Sec. 20.2056A-12 Increased basis for section 2056A estate tax paid

with respect to distribution from a QDOT.

Under section 2056A(b)(13), in the case of any distribution from a

QDOT on which an estate tax is imposed under section 2056A(b)(1)(A),

the distribution is treated as a transfer by gift for purposes of

section 1015, and any estate tax paid under section 2056A(b)(1)(A) is

treated as a gift tax. See Sec. 1.1015-5(c)(4) and (5) of this chapter

for rules for determining the amount by which the basis of the

distributed property is increased.

Sec. 20.2056A-13 Effective date.

The provisions of Secs. 20.2056A-1 through 20.2056A-12 are

effective with respect to estates of decedents dying after August 22,

1995.

Par. 7. Sec. 20.2101-1 is revised to read as follows:

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

(a) Imposition of tax. Section 2101 imposes a tax on the transfer

of the taxable estate of a nonresident who is not a citizen of the

United States at the time of death. In the case of estates of decedents

dying after November 10, 1988, the tax is computed at the same rates as

the tax that is imposed on the transfer of the taxable estate of a

citizen or resident of the United States in accordance with the

provisions of sections 2101(b) and (c). For the meaning of the terms

resident, nonresident, and United States, as applied to a decedent for

purposes of the estate tax, see Sec. 20.0-1(b)(1) and (2). For the

liability of the executor for the payment of the tax, see section 2002.

For special rules as to the phaseout of the graduated rates and unified

credit, see sections 2001(c)(2) and 2101(b).

(b) Special rates in the case of certain decedents. In the case of

an estate of a nonresident who was not a citizen of the United States

and who died after December 31, 1976, and on or before November 10,

1988, the tax on the nonresident's taxable estate is computed using the

formula provided under section 2101(b), except that the rate schedule

in paragraph (c) of this section is to be used in lieu of the rate

schedule in section 2001(c).

(c) Rate schedule for decedents dying after December 31, 1976 and

on or before November 10, 1988.

If the amount for which the The tentative tax is:

tentative tax to be computed is:

Not over $100,000.............. 6% of such amount.

Over $100,000 but not over $6,000, plus 12% of excess over

$500,000. $100,000.

Over $500,000 but not over $54,000, plus 18% of excess over

$1,000,000. $500,000.

Over $1,000,000 but not over $144,000, plus 24% of excess over

$2,000,000. $1,000,000.

Over $2,000,000................ $384,000, plus 30% of excess over

$2,000,000.

[[Page 43552]]

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

read as follows:

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

tax.

* * * * *

(c) Unified credit--

(1) In general. Subject to paragraph (c)(2) of this section, in the

case of estates of decedents dying after November 10, 1988, a unified

credit of $13,000 is allowed against the tax imposed by section 2101

subject to the limitations of section 2102(c).

(2) When treaty is applicable. To the extent required under any

treaty obligation of the United States, the estate of a nonresident not

a citizen of the United States is allowed the unified credit permitted

to a United States citizen or resident of $192,800, multiplied by the

proportion that the total gross estate of the decedent situated in the

United States bears to the decedent's total gross estate wherever

situated.

(3) Certain residents of possessions. In the case of a decedent who

is considered to be a nonresident not a citizen of the United States

under section 2209, there is allowed a unified credit equal to the

greater of $13,000, or $46,800 multiplied by the proportion that the

decedent's gross estate situated in the United States bears to the

total gross estate of the decedent wherever situated.

Par. 9. Section 20.2106-1 is amended as follows:

1. Paragraph (a)(3) is revised.

2. The last sentence of paragraph (b) is removed.

3. Paragraph (c) is removed.

The revision reads as follows:

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

deductions in general.

(a) * * *

(3) Subject to the special rules set forth at Sec. 20.2056A-1(c),

the amount which would be deductible with respect to property situated

in the United States at the time of the decedent's death under the

principles of section 2056. Thus, if the surviving spouse of the

decedent is a citizen of the United States at the time of the

decedent's death, a marital deduction is allowed with respect to the

estate of the decedent if all other applicable requirements of section

2056 are satisfied. If the surviving spouse of the decedent is not a

citizen of the United States at the time of the decedent's death, the

provisions of section 2056, including specifically the provisions of

section 2056(d) and (unless section 2056(d)(4) applies) the provisions

of section 2056A (QDOTs) must be satisfied.

* * * * *

Sec. 20.2106-2 [Amended]

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

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

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

follows:

Authority: 26 U.S.C. 7805.

Par. 12. Section 25.2503-2 is amended as follows:

1. The first sentence in paragraph (a) is revised.

2. Paragraph (f) is added.

3. The revision and addition read as follows:

Sec. 25.2503-2 Exclusion from gifts.

(a) * * * Except as provided in paragraph (f) of this section

(involving gifts to a noncitizen spouse), the first $10,000 of gifts

made to any one donee during the calendar year 1982 or any calendar

year thereafter, except gifts of future interests in property as

defined in Secs. 25.2503-3 and 25.2503-4, is excluded in determining

the total amount of gifts for the calendar year. * * *

* * * * *

(f) Special rule in the case of gifts made on or after July 14,

1988, to a spouse who is not a United States citizen--(1) In general.

Subject to the special rules set forth at Sec. 20.2056A-1(c) of this

chapter, in the case of gifts made on or after July 14, 1988, if the

donee of the gift is the donor's spouse and the donee spouse is not a

citizen of the United States at the time of the gift, the first

$100,000 of gifts made during the calendar year to the donee spouse

(except gifts of future interests) is excluded in determining the total

amount of gifts for the calendar year. The rule of this paragraph (f)

applies regardless of whether the donor is a citizen or resident of the

United States for purposes of chapter 12 of the Internal Revenue Code.

(2) Gifts made after June 29, 1989. In the case of gifts made after

June 29, 1989, the $100,000 exclusion provided in paragraph (f)(1) of

this section applies only if the gift in excess of the otherwise

applicable annual exclusion is in a form that qualifies for the gift

tax marital deduction under section 2523(a) but for the provisions of

section 2523(i)(1) (disallowing the marital deduction if the donee

spouse is not a United States citizen.) See Sec. 25.2523(i)-1(d),

Example 4.

(3) Effective date. This paragraph (f) is effective with respect to

gifts made after August 22, 1995.

Par. 13. Secs. 25.2523(i)-1, 25.2523(i)-2 and 25.2523(i)-3 are

added to read as follows:

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

a United States citizen.

(a) In general. Subject to Sec. 20.2056A-1(c) of this chapter,

section 2523(i)(1) disallows the marital deduction if the spouse of the

donor is not a citizen of the United States at the time of the gift. If

the spouse of the donor is a citizen of the United States at the time

of the gift, the gift tax marital deduction under section 2523(a) is

allowed regardless of whether the donor is a citizen or resident of the

United States at the time of the gift, subject to the otherwise

applicable rules of section 2523.

(b) Exception for certain joint and survivor annuities. Paragraph

(a) does not apply to disallow the marital deduction with respect to

any transfer resulting in the acquisition of rights by a noncitizen

spouse under a joint and survivor annuity described in section

2523(f)(6).

(c) Increased annual exclusion--(1) In general. In the case of

gifts made from a donor to the donor's spouse for which a marital

deduction is not allowable under this section, if the gift otherwise

qualifies for the gift tax annual exclusion under section 2503(b), the

amount of the annual exclusion under section 2503(b) is $100,000 in

lieu of $10,000. However, in the case of gifts made after June 29,

1989, in order for the increased annual exclusion to apply, the gift in

excess of the otherwise applicable annual exclusion under section

2503(b) must be in a form that qualifies for the marital deduction but

for the disallowance provision of section 2523(i)(1). See paragraph

(d), Example 4, of this section.

(2) Status of donor. The $100,000 annual exclusion for gifts to a

noncitizen spouse is available regardless of the status of the donor.

Accordingly, it is immaterial whether the donor is a citizen, resident

or a nonresident not a citizen of the United States, as long as the

spouse of the donor is not a citizen of the United States at the time

of the gift and the conditions for allowance of the increased annual

exclusion have been satisfied. See Sec. 25.2503-2(f).

(d) Examples. The principles outlined in this section are

illustrated in the following examples. Assume in each of the examples

that the donee, S, is D's spouse and is not a United States citizen at

the time of the gift.

[[Page 43553]]

Example 1. Outright transfer of present interest. In 1995, D, a

United States citizen, transfers to S, outright, 100 shares of X

corporation stock valued for federal gift tax purposes at $130,000.

The transfer is a gift of a present interest in property under

section 2503(b). Additionally, the gift qualifies for the gift tax

marital deduction except for the disallowance provision of section

2523(i)(1). Accordingly, $100,000 of the $130,000 gift is excluded

from the total amount of gifts made during the calendar year by D

for gift tax purposes.

Example 2. Transfer of survivor benefits. In 1995, D, a United

States citizen, retires from employment in the United States and

elects to receive a reduced retirement annuity in order to provide S

with a survivor annuity upon D's death. The transfer of rights to S

in the joint and survivor annuity is a gift by D for gift tax

purposes. However, under paragraph (b) of this section, the gift

qualifies for the gift tax marital deduction even though S is not a

United States citizen.

Example 3. Transfer of present interest in trust property. In

1995, D, a resident alien, transfers property valued at $500,000 in

trust to S, who is also a resident alien. The trust instrument

provides that the trust income is payable to S at least quarterly

and S has a testamentary general power to appoint the trust corpus.

The transfer to S qualifies for the marital deduction under section

2523 but for the provisions of section 2523(i)(1). Because S has a

life income interest in the trust, S has a present interest in a

portion of the trust. Accordingly, D may exclude the present value

of S's income interest (up to $100,000) from D's total 1995 calendar

year gifts.

Example 4. Transfer of present interest in trust property. The

facts are the same as in Example 3, except that S does not have a

testamentary general power to appoint the trust corpus. Instead, D's

child, C, has a remainder interest in the trust. If S were a United

States citizen, the transfer would qualify for the gift tax marital

deduction if a qualified terminable interest property election was

made under section 2523(f)(4). However, because S is not a U.S.

citizen, D may not make a qualified terminable interest property

election. Accordingly, the gift does not qualify for the gift tax

marital deduction but for the disallowance provision of section

2523(i)(1). The $100,000 annual exclusion under section 2523(i)(2)

is not available with respect to D's transfer in trust and D may not

exclude the present value of S's income interest in excess of

$10,000 from D's total 1995 calendar year gifts.

Example 5. Spouse becomes citizen after transfer. D, a United

States citizen, transfers a residence valued at $350,000 on December

20, 1995, to D's spouse, S, a resident alien. On January 31, 1996, S

becomes a naturalized United States citizen. On D's federal gift tax

return for 1995, D must include $250,000 as a gift ($350,000

transfer less $100,000 exclusion). Although S bec

This text is long and has been trimmed here. Open the source document for the complete record.