Issue: August 4, 1989
Section 2056 -- Bequests, etc., to Surviving Spouse (Marital Deduction v. No Marital Deduction)
2056.00-00 Bequests, etc., to Surviving Spouse (Marital Deduction v. No Marital Deduction)
CC:P&SI:Br.4/TR-31-04612-88
LEGEND:
Taxpayer = * * *
Trust = * * *
Spouse = * * *
Corporation = * * *
Dear * * *
This is in response to your letter dated March 13, 1989, and prior correspondence on behalf of Taxpayer concerning the application of section 2056(b)(7) of the Internal Revenue Code.
The facts, as submitted, indicate that Taxpayer established Trust on February 8, 1988. Upon Taxpayer's death, the trustee is directed to establish a 'Marital Trust' to be held and administered as a separate share for the benefit of Spouse, and a 'Children's Trust' to be held and administered as a separate share for the benefit of Taxpayer's children or their issue. Corpus of the two shares will consist entirely of Taxpayer's interest in Corporation, an entity that is wholly owned by Taxpayer. Taxpayer's interest in Corporation is to be allocated to the two trusts under a formula which, if applicable today, would allocate 20 percent of Taxpayer's interest to the marital share and 80 percent of the Taxpayer's interest to the children's share.
Under Article 8.1 of the trust, the trustee is directed to pay the income from the marital share to Spouse at least quarter-annually during Spouse's
lifetime. Under Article 8.2, the trustee in authorized to invade corpus for Spouse's health, education, support or maintenance. Under Article 13.4, Spouse is given a general power of appointment over any marital trust income accrued or held undistributed at Spouse's death.
Article 8.3 of the trust provides:
If the Trustee shall determine that it is necessary or desirable to dispose of all or a portion of the Marital Trust's shares in [Corporation] and all of the shares of the . . . Children's Trust are not also being disposed of in the same transaction, the Trustee shall first offer to sell those shares to the . . . Children's Trust at their fair market value as reasonably determined by the Trustee. . . . [I]f the Trustee shall sell, exchange, liquidate, or otherwise dispose of the Marital Trust's shares in [Corporation] during [Spouse's] lifetime, the trust shall distribute the balance of the Marital Trust to [Spouse].
Under Article 16.17.A of the trust instrument, as amended on March 1, 1989, Trustee is authorized:
To continue to hold any property, . . . and to operate, at the risk of the trust, any business that the trustee receives or acquires under this agreement for as long as he deems advisable. The trustee is expressly authorized to buy or otherwise acquire unproductive property. However, notwithstanding any other provision of this agreement, the Trustee shall
promptly dispose of any unproductive or underproductive property in any trust of which [Spouse] is the sole income beneficiary if [Spouse] requests in writing that the Trustee do so, regardless of whether that property was received by the Trustee under this agreement, bought by the Trustee, or otherwise acquired by the Trustee.
Section 2056(a) of the Code provides that the value of a decedent's taxable estate is to be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property which passes or has passed from the decedent to the surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.
Section 2056(b)(1) of the Code provides the general rule that no deduction is allowable for bequests to the surviving spouse of certain terminable interests.
Section 2056(b)(7) of the Code provides a deduction for qualified terminal interest property (QTIP). Subsection (B)(i) of that section defines QTIP to mean property--
(I) which passes from the decedent,
(II) in which the surviving spouse has a qualified income interest for life, and
(III) to which a QTIP election applies.
Subsection (B)(ii) provides that a surviving spouse has a qualified income interest for life if--
(I) the surviving spouse is entitled to all the income from the property payable at least annually, and
(II) no person has a power during the spouse's life to appoint any part of the property to any person other than the surviving spouse.
In general, with respect to the requirement that the spouse must be entitled to all the income for life ('income requirement'), the principles contained in section 20.2056(b)-5(f) of the Estate Tax Regulations are applicable to QTIP trusts. See H.R. Rep. No. 97-201, 97th Cong. 1st Sess. 101 (1981), 1981-2 C.B. 352, 378.
Section 20.2056(b)-5(f)(6) of the regulations provides that an interest will satisfy the 'income requirement' where the trust may be terminated by distribution of the trust corpus to the spouse, if the spouse is entitled to all of the income until the trust terminates.
Section 20.2056(b)-5(f)(5) of the regulations provides that an interest will not satisfy the 'income requirement' if the primary purpose of the trust is to safeguard property without providing the spouse with the required beneficial enjoyment.
Section 20.2056(b)-5(f)(4) of the regulations provides that a power to retain unproductive assets will not disqualify an interest if the applicable rules permit the spouse to require that the trustee make the property productive or convert it within a reasonable time.
RULING REQUEST.
You request a ruling that Spouse will have a qualifying income interest for life in the Marital Trust within the meaning of section 2056(b)(7)(B)(ii) of the Code notwithstanding (1) the early termination provision, or (2) the right given the Children's Trust to purchase the Corporation stock.
Consistent with section 20.2056(b)-5(f)(6) of the regulations, the requirement that the trust terminate in favor of Spouse upon the sale of the Corporation stock will not cause the interest of Spouse to fail the 'income requirement.'
Under the provisions of Article 8.1 of the trust, Spouse is entitled to all the income, if any, generated by the marital trust corpus, payable at least quarter-annually.
You indicate that it is the taxpayer's desire to divide any economic benefit derived from Corporation among the Spouse and the children. You state however, that '. . . the taxpayer also desires that the shareholders' power to make business decisions affecting Corporation be held by a single individual unrelated to the beneficiaries of either the Marital Trust or the Children's Trust.' Thus, it would appear that Taxpayer intends for the Marital Trust and the Children's Trust to have common trustees; that business decisions involving
Corporation be removed from the potential for family conflict; and that voting decisions made by the trustee are to be made without regard to any conflicting desires or needs of particular beneficiaries.
Absent any other provision, it would thus appear that there is no assurance that any income would, in fact, be generated by the Marital Trust. However, under the provisions of Article 16.17.A, Spouse has the ability to force the trustee to make unproductive property productive. Given the fact that Corporation is a closely-held entity and the Children's Trust (owner of the controlling interest) is one of the most likely purchasers of the minority interest held by the Marital Trust, we do not consider the thirty day right of first refusal to place an undue burden on the ability of Spouse to require that the trust corpus be made productive.
Thus, consistent with the section 20.2056(b)-5(f)(4) of the regulations, the provisions allowing the trustee to retain the Corporation stock without regard to its productivity and the provision concerning the sale of the Corporation stock to the Children's Trust will not cause the interest of Spouse to fail the 'income requirement.'
Thus, we conclude that the interest of Spouse in the Marital Trust constitutes a qualified income interest for purposes of section 2056(b)(7) of the Code.
No opinion is expressed as to tax consequences under any other provisions of
the Code. We are specifically not expressing any opinion as to the proper methodology to be used in determining the value of the interest that will pass from the taxpayer to the Marital Trust at death.
This ruling is based on the facts and applicable law in effect on the date of this letter. If there is a change in material fact or law (local or federal) before the death of Taxpayer, the ruling will have no force or effect. If Taxpayer is in doubt whether there has been a change in material fact or law, a request for reconsideration of this ruling should be submitted to this office.
This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. Temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not been adopted. Therefore, this ruling will be modified or revoked by the adoption of temporary or final regulations to the extent that the regulations are inconsistent with any position contained herein. See section 11.03 of Rev. Proc. 89-2, 1989-1 I.R.B. 21. However, when the criteria of section 11.04 of Rev. Proc. 89-2 are satisfied, a ruling is not revoked or modified retroactively, except in rare and unusual circumstances.
A copy of this letter should be attached to any gift, estate or transfer tax returns that you may file relating to these matters.
Sincerely,
Assistant Chief Counsel
(Passthroughs and Special Industries)
By: Richard Grosgebauer
Chief, Branch 4
Enclosure:
Copy for Section 6110 purposes
This document may not be used or cited as precedent. Section 6110(j)(3) of the Internal Revenue Code.
PLR 8931005, 1989 WL 594214 (I.R.S.)