IRS Revenue Ruling
2000-2

 Code Sec. 2056

<<FULL TEXT>>

Spouse 26 CFR 20.2056(a)-1: Qualified terminable interest property
elections.

Qualified terminable interest property (QTIP) elections. This ruling
holds that an executor may elect under section 2056(b)(7) of the Code to
treat an individual retirement account and a testamentary trust as QTIP
under certain conditions. Rev. Rul. 89-89 obsoleted.


REV. RUL. 2000-2

ISSUE

May an executor elect under section 2056(b)(7) of the Internal Revenue
Code to treat an individual retirement account (IRA) and a trust as
qualified terminable interest property (QTIP) if the trustee of the trust
is the named beneficiary of decedent's IRA and the surviving spouse can
compel the trustee to withdraw from the IRA an amount equal to all the
income earned on the IRA assets at least annually and to distribute that
amount to the spouse?


FACTS

A died in 1999 at the age of 55, survived by spouse, B, who was 50
years old. Prior to death, A established an IRA described in section
408(a). The IRA is invested only in productive assets. A named the trustee
of a testamentary trust established under A's will as the beneficiary of
all amounts payable from the IRA after A's death. A copy of the
testamentary trust and a list of the trust beneficiaries were provided to
the custodian of A's IRA within nine months after A's death. As of the
date of A's death, the testamentary trust was irrevocable and was a valid
trust under the laws of the state of A's domicile. The IRA was includible
in A's gross estate under section 2039.

Under the terms of the testatmentary trust, all trust income is payable
annually to B, and no one has the power to appoint trust principal to any
person other than B. A's children, who are all younger than B, are the
sole remainder beneficiaries of the trust. No other person has a
beneficial interest in the trust. Under the terms of the trust, B has the
power, exercisable annually, to compel the trustee to withdraw from the
IRA an amount equal to the income earned on the assets held by the IRA
during the year and to distribute that amount through the trust to B. The
IRA document contains no prohibition on withdrawal from the IRA of amounts
in excess of the annual minimum required distributions under section
408(a)(6).

In accordance with the terms of the IRA instrument, the trustee of the
testamentary trust elects, in order to satisfy section 408(a)(6), to
receive annual minimum required distributions using the exception to the
five year rule in section 401(a)(9)(B)(iii) for distributions over a
distribution period equal to a designated beneficiary's life expectancy.
Because B's life expectancy is the shortest of all the potential
beneficiaries of the testamentary trust's interest in the IRA (including
remainder beneficiaries), the distribution period for purposes of section
401(a)(9)(B)(iii) is B's life expectancy. Because B is not the sole
beneficiary of the testamentary trust's interest in the IRA, the trustee
elected to have the annual minimum required distributions from the IRA to
the testamentary trust begin no later than December 31 of the year
immediately following the year of A's death. The amount of the annual
minimum required distribution for each year is calculated by dividing the
account balance of the IRA as of the December 31 immediately preceding the
year by the remaining distribution period. On B's death, any undistributed
balance of the IRA will be distributed to the testamentary trust over the
remaining distribution period.


LAW AND ANALYSIS

Section 2056(a) provides that the value of the taxable estate is,
except as limited by section 2056(b), determined by deducting from the
value of the gross estate an amount equal to the value of any interest in
property that passes from the decedent to the surviving spouse.

Under section 2056(b)(1), if an interest passing to the surviving
spouse will terminate, no deduction is allowed with respect to the
interest if, after termination of the spouse's interest, an interest in
the property passes or has passed from the decedent to any person other
than the surviving spouse (or the estate of the spouse).

Section 2056(b)(7) provides that QTIP, for purposes of section 2056(a),
is treated as passing to the surviving spouse and no part of the property
shall be treated as passing to any person other than the surviving spouse.
Section 2056(b)(7)(B)(i) defines QTIP as property that passes from the
decedent, in which the surviving spouse has a qualifying income interest
for life, and to which an election applies. Under section
2056(b)(7)(B)(ii), the surviving spouse has a qualifying income interest
for life if (I) the surviving spouse is entitled to all the income from
the property, payable annually or at more frequent intervals, or has a
usufruct interest for life in the property, and (II) no person has a power
to appoint any part of the property to any person other than the surviving
spouse.

Section 20.2056(b)-7(d)(2) of the Estate Tax Regulations provides that
the principles of section 20.2056(b)-5(f), relating to whether the spouse
is entitled for life to all of the income from the entire interest, apply
in determining whether the surviving spouse is entitled for life to all of
the income from the property for QTIP purposes.

Section 20.2056(b)-5(f)(1) provides that, if an interest is transferred
in trust, the surviving spouse is entitled for life to all of the income
from the entire interest, if the effect of the trust is to give the
surviving spouse substantially that degree of beneficial enjoyment of the
trust property during the surviving spouse's life which the principles of
the law of trusts accord to a person who is unqualifiedly designated as
the life beneficiary of a trust.

Section 20.2056(b)-5(f)(8) provides that the terms "entitled for life"
and "payable annually or at more frequent intervals" require that under
the terms of the trust the income referred to must be currently (at least
annually) distributable to the spouse or that the spouse must have such
command over the income so that it is virtually the spouse's. Thus, the
surviving spouse will be entitled for life to all of the income from the
interest, payable annually, if, under the terms of the trust instrument,
the spouse has the right exercisable annually (or more frequently) to
require distribution to the spouse of the trust income, and otherwise the
trust income is to be accumulated and added to corpus.

In the present situation, the IRA is payable to a trust the terms of
which entitle B to receive all trust income, payable annually. In
addition, no one has a power to appoint any part of the property in the
trust or the IRA to any person other than B. Therefore, whether A's
executor can elect to treat the trust and the IRA as QTIP depends on
whether B is entitled to all the income for life from the IRA, payable
annually.

Under the terms of the testamentary trust, B is given the power,
exercisable annually, to compel the trustee to withdraw from the IRA an
amount equal to all the income earned on the assets held in the IRA and
pay that amount to B. If B exercises this power, the trustee must withdraw
from the IRA the greater of the amount of income earned on the IRA assets
during the year or the annual minimum required distribution. Nothing in
the IRA instrument prohibits the trustee from withdrawing such amount from
the IRA. If B does not exercise Us power, the trustee must withdraw from
the IRA only the annual minimum required distribution.

B's power to compel the trustee's action meets the standard set forth
in section 20.2056(b)5(f)(8) for the surviving spouse to be entitled to
all the income for life payable annually. Thus, B has a qualifying income
interest for life within the meaning of section 2056(b)(7) in both the IRA
and the testamentary trust. Furthermore, B has a qualifying income
interest for life in the IRA and the testamentary trust for purposes of
sections 2519 and 2044. Because the trust is a conduit for payments equal
to income from the IRA to B, A's executor needs to make the QTIP election
under section 2056(b)(7) for both the IRA and the testamentary trust.

The result would be the same if the terms of the testamentary trust
require the trustee to withdraw from the IRA annually an amount equal to
all the income earned on the IRA assets and pay that amount to the
surviving spouse.


HOLDING

An executor may elect under section 2056(b)(7) to treat an IRA and a
trust as QTIP when the trustee of the trust is the named beneficiary of
the decedent's IRA, the surviving spouse can compel the trustee to
withdraw from the IRA an amount equal to all the income earned on the IRA
assets at least annually and to distribute that amount to the spouse, and
no person has a power to appoint any part of the trust property to any
person other than the spouse.


EFFECT ON OTHER REVENUE RULING(S)

Rev. Rul. 89-89, 1989-2 C.B. 231, is obsoleted.


DRAFTING INFORMATION

The principal author of this revenue ruling is Donna L. Mucha of the
Office of Assistant Chief Counsel (Passthroughs and Special Industries).
For further information regarding this revenue ruling contact Donna L.
Mucha on (202) 622-3120 (not a toll-free call).

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