Estate & Gift Tax Marital Deduction

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 20 and 602 [TD 8779] RIN 1545-
AU27

TITLE: Estate and Gift Tax Marital Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations amending the
estate tax marital deduction regulations. The amendments are made to
conform the estate tax regulations to recent court decisions in
Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992),
rev'g 97 T.C. 327 (1991); Estate of Robertson v.

Commissioner, 15 F.3d 779 (8th Cir. 1994), rev'g 98 T.C. 678 (1992);
Estate of Spencer v. Commissioner, 43 F.3d 226 (6th Cir.

1995), rev'g T.C. Memo. 1992-579; and Estate of Clack v.

Commissioner, 106 T.C. 131 (1996). The amendments affect estates of
decedents electing the marital deduction for qualified terminable
interest property (QTIP) and the estates of the surviving spouses of
such decedents.

DATES: These regulations are effective August 19, 1998.

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

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act The collection of information in these final
regulations has been reviewed and, pending receipt and evaluation of
public comments, approved by the Office of Management and Budget
(OMB) under 44 U.S.C. 3507 and assigned control number 1545-1612.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number assigned by OMB.

The collection of information in this regulation is in
�20.2056(b)-7(d)(3)(ii). This information is required to provide a
method for estates of decedents whose estate tax returns were due on
or before February 18, 1997, to obtain an extension of time to make
the qualified terminable interest property election under section
2056(b)(7)(B)(v). This information will be used to inform the IRS of
the affected estates that are electing to obtain the relief granted
in the regulation. The collection of information is mandatory for
those estates that seek relief. The likely respondents are
individuals representing estates.

Comments concerning the collection of information should be directed
to OMB, Attention: Desk Officer for the Department of the Treasury,
Office of Information and Regulatory Affairs, Washington, DC 20503,
with copies to the Internal Revenue Service, Attention: IRS Reports
Clearance Officer, OP:FS:FP, Washington, DC 20224. Any such comments
should be submitted not later than October 19, 1998. Comments are
specifically requested concerning:

Whether the collection of information is necessary for the proper
performance of the functions of the IRS, including whether the
information will have practical utility.

The accuracy of the estimated burden associated with the collection
of information (see below); How to enhance the quality, utility, and
clarity of the information collected; How to minimize the burden of
complying with the collection of information, including the
application of automated collection techniques or other forms of
information technology; and Estimates of capital or start-up costs
and costs of operation, maintenance, and purchase of services to
provide information.

Estimates of the reporting burden in these final regulations will be
reflected in the burden of Form 843 (Claim for Refund and Request
for Abatement) and Form 706 (Estate Tax Return) or 706NA (Estate Tax
Return for Nonresident Noncitizens).

Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law.

Generally, tax returns and tax return information are confidential,
as required by 26 U.S.C. 6103.

Background

On March 1, 1994, the IRS published final estate and gift tax
regulations (26 CFR part 20 and part 25) under sections 2044, 2056,
2207A, 2519, 2523, and 6019 of the Internal Revenue Code (Code) in
the Federal Register (59 FR 9642). At that time, �20.2056(b)-7(d)(3)
provided that an income interest (or life estate) that is contingent
upon the executor's election under section 2056(b)(7)(B)(v) (the
QTIP election) is not a qualifying income interest for life.

On February 18, 1997, temporary regulations (TD 8714) amending the
existing final estate tax regulations relating to the marital
deduction for qualified terminable interest property (QTIP) were
published in the Federal Register (62 FR 7156). A notice of proposed
rulemaking (REG-209830-96) cross-referencing the temporary
regulations was published in the Federal Register (62 FR 7188) for
the same day.

The temporary regulations provide that an income interest for life
(or life estate) that is contingent upon the executor's QTIP
election, will not, because of the contingency, fail to be a
qualifying income interest for life.

Written comments responding to the notice of proposed rulemaking
were received. A public hearing was held on June 3, 1997. After
consideration of all the comments, the proposed regulations under
sections 2044 and 2056 are adopted as revised by this Treasury
decision, and the corresponding temporary regulations are removed.

Explanation of Revisions and Summary of Comments Under section
2056(b)(7)(B)(ii), the surviving spouse has a qualifying income
interest for life in property which passes from the decedent if (1)
the surviving spouse is entitled to all of the income from the
property, payable at least annually (or has a usufruct interest for
life in the property), and (2) no person has a power to appoint any
part of the property to any person other than the surviving spouse.

Commentators suggested that the regulation, based on the case law,
should specifically provide that as a result of the executor's
election over a portion of the property, in cases where the
unelected portion of the property passes to a beneficiary other than
the surviving spouse, the executor will not be considered to have a
power to appoint any part of the property to any person other than
the surviving spouse.

The final regulation is clarified to provide that an interest in
property is eligible for treatment as qualified terminable interest
property if the income interest is contingent upon the executor's
election and if that portion of the property for which no election
is made will pass to or for the benefit of beneficiaries other than
the surviving spouse. Two examples provided in the temporary
regulations have been revised in the final regulations to conform to
this clarification.

Comments were also received regarding the effective date of the
temporary regulations. It was suggested that relief should be made
available for estates of decedents that did not make the QTIP
election on their estate tax returns because the surviving spouse's
income interest in the property was contingent upon the election or
because the nonelected portion of the property was to pass to a
beneficiary other than the surviving spouse.

Accordingly, the final regulations provide that estates of decedents
whose estate tax returns were due on or before February 18, 1997,
are granted an extension of time to make the QTIP election if: (1)
the period of limitations on filing a claim for credit or refund
under section 6511(a) has not expired; and (2) the estate submits a
statement providing that, pursuant to section 2044, the surviving
spouse's gross estate will include the value, at the date of the
surviving spouse's death, of the property for which the QTIP
election is being made. The statement must be signed, under
penalties of perjury, by the surviving spouse, the surviving
spouse's legal representative (if the surviving spouse is legally
incompetent), or the surviving spouse's executor (if the surviving
spouse is deceased).

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations and, because these
regulations do not impose on small entities a collection of
information requirement, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.

Drafting Information

The principal author of these regulations is Susan B.

Hurwitz, Office of Assistant Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and the Treasury
Department participated in their development.

List of Subjects

26 CFR Part 20 Estate taxes, Reporting and recordkeeping
requirements.

26 CFR Part 602 Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR parts
20 and 602 are amended as follows:

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

Paragraph 1. The authority citation for part 20 continues to read in
part as follows:

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

Par. 2. In �20.2044-1, paragraph (e) Example 8 is added to read as
follows:

�20.2044-1 Certain property for which marital deduction was
previously allowed.

* * * * *

(e) * * *

Example 8. Inclusion of trust property when surviving spouse dies
before first decedent's estate tax return is filed.

D dies on July 1, 1997. Under the terms of D's will, a trust is
established for the benefit of D's spouse, S. The will provides that
S is entitled to receive the income from that portion of the trust
that the executor elects to treat as qualified terminable interest
property. The remaining portion of the trust passes as of D's date
of death to a trust for the benefit of C, D's child.

The trust terms otherwise provide S with a qualifying income
interest for life under section 2056(b)(7)(B)(ii). S dies on
February 10, 1998. On April 1, 1998, D's executor files D's estate
tax return on which an election is made to treat a portion of the
trust as qualified terminable interest property under section
2056(b)(7). S's estate tax return is filed on November 10, 1998. The
value on the date of S's death of the portion of the trust for which
D's executor made a QTIP election is includible in S's gross estate
under section 2044.

�20.2044-1T [Removed]

Par. 3. Section 20.2044-1T is removed.

Par. 4. In �20.2056(b)-(7), paragraphs (d)(3) and (h) Example 6 are
revised to read as follows:

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

* * * * *

(d) * * *

(3) Contingent income interests. (i) An income interest for a term
of years, or a life estate subject to termination upon the
occurrence of a specified event (e.g., remarriage), is not a
qualifying income interest for life. However, a qualifying income
interest for life that is contingent upon the executor's election
under section 2056(b)(7)(B)(v) will not fail to be a qualifying
income interest for life because of such contingency or because the
portion of the property for which the election is not made passes to
or for the benefit of persons other than the surviving spouse. This
paragraph (d)(3)(i) applies with respect to estates of decedents
whose estate tax returns are due after February 18, 1997. This
paragraph (d)(3)(i) also applies to estates of decedents whose
estate tax returns were due on or before February 18, 1997, that
meet the requirements of paragraph (d)(3)(ii) of this section.

(ii) Estates of decedents whose estate tax returns were due on or
before February 18, 1997, that did not make the election under
section 2056(b)(7)(B)(v) because the surviving spouse's income
interest in the property was contingent upon the election or because
the nonelected portion of the property was to pass to a beneficiary
other than the surviving spouse are granted an extension of time to
make the QTIP election if the following requirements are satisfied:

(A) The period of limitations on filing a claim for credit or refund
under section 6511(a) has not expired.

(B) A claim for credit or refund is filed on Form 843 with a revised
Recapitulation and Schedule M, Form 706 (or 706NA) that signifies
the QTIP election. Reference to this section should be made on the
Form 843.

(C) The following statement is included with the Form 843:

"The undersigned certifies that the property with respect to which
the QTIP election is being made will be included in the gross estate
of the surviving spouse as provided in section 2044 of the Internal
Revenue Code, in determining the federal estate tax liability on the
spouse's death." The statement must be signed, under penalties of
perjury, by the surviving spouse, the surviving spouse's legal
representative (if the surviving spouse is legally incompetent), or
the surviving spouse's executor (if the surviving spouse is
deceased).

* * * * *

(h) * * *

Example 6. Spouse's qualifying income interest for life contingent
on executor's election. D's will established a trust providing that
S is entitled to receive the income, payable at least annually, from
that portion of the trust that the executor elects to treat as
qualified terminable interest property. The portion of the trust
which the executor does not elect to treat as qualified terminable
interest property passes as of D's date of death to a trust for the
benefit of C, D's child. Under these facts, the executor is not
considered to have a power to appoint any part of the trust property
to any person other than S during S's life.

* * * * *

�20.2056(b)-7T [Removed] Par. 5. Section 20.2056(b)-7T is removed.

Par. 6. Section 20.2056(b)-10 is revised to read as follows:

�20.2056(b)-10 Effective dates.

Except as specifically provided in ��20.2056(b)-5(c)(3)(ii) and
(iii), 20.2056(b)-7(d)(3), 20.2056(b)-7(e)(5), and 20.2056(b)-8(b),
the provisions of ��20.2056(b)-5(c), 20.2056(b)-7, 20.2056(b)-8, and
20.2056(b)-9 are applicable with respect to estates of decedents
dying after March 1, 1994. With respect to decedents dying on or
before such date, the executor of the decedent's estate may rely on
any reasonable interpretation of the statutory provisions.

�20.2056(b)-10T [Removed]

Par. 7. Section 20.2056(b)-10T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT Par.
8. In �602.101, paragraph (c), the entry in the table for
20.2056(b)-7 is revised to read as follows:

�602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

20.2056(b)-7....................................1545-0015 1545-1612

* * * * *

Michael P. Dolan
Deputy Commissioner of Internal Revenue
Approved: July 27, 1998
Donald C. Lubick
Assistant Secretary of the Treasury

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