Section 2056 -- Marital Deduction
UIL Number(s) 0408.06-00, 2056.01-01
Date: October 31, 1996
Refer Reply to: CP:E:EO:T-1
LEGEND:
Taxpayer H (H) = * * *
Taxpayer W (W) = * * *
IRA = * * *
Irrevocable Trust = * * *
State N = * * *
Dear * * *
[1] This is in response to a letter dated April 5, 1995, as supplemented by additional correspondence dated June 5, July 25, August 6, October 10, and October 21, 1996, in which your authorized representative requested private letter rulings on your behalf regarding the income and estate tax consequences of certain transactions involving an individual retirement arrangement (IRA) owned by Taxpayer H, and a testamentary trust established by Taxpayer H for his benefit and the benefit of his spouse, Taxpayer W.
I. FACTS
[2] In furtherance of this ruling request, your representative makes the following statements and representations:
[3] Taxpayers H and W, are husband and wife. H was born in * * * and W in * * *. both individuals are retired, and both are citizens of the United States.
[4] H is the owner of an IRA into which he has rolled over the distribution received from a qualified pension plan. The IRA represents the bulk of H's assets. At the time H attained age 70 1/2, he began to withdraw funds from the IRA, payable over the joint life expectancy of Taxpayers H and W, and the survivor of them, recalculated annually. The amounts of H's annual withdrawals from the IRA are calculated to satisfy the minimum distribution requirements of section 401(a)(9) of the Internal Revenue Code. W is the designated beneficiary of any death benefit from the IRA, and it is H's desire that, after his death, W shall continue to be treated as the beneficiary of the IRA so that withdrawals may continue to be made for her benefit over her life expectancy.
[5] H has executed a "pour over" will and an Irrevocable Trust. The Irrevocable Trust was created in December 1994, and was nominally funded at that time. You represent that the trust is valid under state law. The terms of the trust provide that at H's death the trust is to be divided into two separate trusts: a marital trust (the "QTIP Trust") and a residuary trust. All death taxes and administration expenses are to be paid from the residuary trust.
[6] The terms of the QTIP Trust provide that H's IRA is the only asset that is to be used to fund the trust, and that W shall receive all of the trust's income during her lifetime. The trustee is required to withdraw from the IRA and distribute to W, on an annual basis, the greater of (1) all income earned within the IRA, or (2) the amount necessary to satisfy the minimum distribution requirements of section 401(a)(9) of the Code. The trustee must withdraw funds from H's IRA and distribute them to W at least as rapidly as under the method of distribution in effect at the time of H's death. W has the power to require the trustee to convert unproductive property to income producing property. The trustee may also withdraw from the IRA and distribute to W such amounts as the trustee determines to be necessary for W's health, maintenance, and support. Any distributions from principal are to be charged first against the portion of the IRA and the portion of the trust for which an election is made under section 2056(b)(7), and then against the portion of the trust for which no election was made. During W's life, no person has the power to appoint any part of the trust property to any person other than W.
[7] The terms of the Irrevocable Trust provide that the executor/trustee will elect to qualify for the federal estate tax marital deduction a fractional or percentage share of the QTIP Trust sufficient to reduce the federal estate tax in H's estate to zero. In addition, the executor/trustee also will elect to qualify the same fraction or percentage of the IRA for the marital deduction. After W's death, or after H's death if he survives W, any remaining principal and undistributed income from the IRA is to be withdrawn by the trustee and distributed in equal shares to H's and W's children and their descendants per stirpes.
[8] To implement the plan described above and assuming the Internal Revenue Service acts favorably on this ruling request, H proposes to execute a new beneficiary designation for his IRA death benefits, naming the QTIP Trust as the designated beneficiary of all death benefits. W will consent to the designation of the QTIP Trust as IRA beneficiary by executing a waiver of her rights to object to or prevent such a beneficiary designation. The trustee of the Irrevocable Trust will deliver a copy of the trust document to the IRA custodian immediately upon H's designation of that trust as the beneficiary of his IRA.
II. RULINGS REQUESTED
[9] Based on the above statements and representations, Taxpayers H and W request the following rulings:
1. That upon having executed the proposed beneficiary
designation form, which names the QTIP Trust as beneficiary of any
death proceeds of the IRA, H will continue to be able, during his
lifetime, to make withdrawals from the IRA over the joint life
expectancy of H and W, and the survivor of them, recalculated
annually, as necessary to satisfy the minimum distributions
requirements of section 401(a)(9) of the Code. Such distributions
will be subject to tax under sections 408(d) and 72 of the Code,
without being subject to excise tax under section 4974.
2. That after Taxpayer H's designation of the QTIP Trust as the
death beneficiary of his IRA, Taxpayer W will continue to be deemed
the individual designated as death beneficiary of H's IRA.
3. That the terms of the QTIP Trust, requiring the trustee to
make withdrawals from the IRA after the death of H at least as
rapidly as under the method of distribution in effect on the date of
H's death, will permit H's IRA and the trust to continue to meet the
minimum distribution requirements of sections 408(a)(6) and 401(a)(9)
of the Code.
4. That if the executor/trustee of the QTIP Trust makes an
election under section 2056(b)(7)(B)(v) to treat a portion of the IRA
and portion of the QTIP Trust as qualified terminable interest
property, that portion of the QTIP Trust and the IRA will be eligible
for a federal estate tax marital deduction under section 2056(b)(7).
III. RULING REQUEST NUMBER 1
[10] With regard to issue number 1, section 401(a)(9)(A)(i) of the Code provides, in general, that a trust shall not constitute a qualified trust unless the plan provides that the entire interest of such employee will be distributed to such employee not later than the required beginning date. If the entire interest of such employee is not distributed by its required beginning date, section 401(a)(9)(A)(ii) of the Code required that it will be distributed, beginning not later than the required beginning date, over the life of such employee or over the lives of such employee and a designated beneficiary (or over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and a designated beneficiary). Section 401(a)(9)(C) of the Code defines the term "required beginning date" to mean April 1 of the calendar year following the calendar year in which the employee attains age 70-1/2. Section 401(a)(9)(E) defines a designated beneficiary as any individual designated as a beneficiary by the employee.
[11] Sections 408(a)(6) of the Code provides that rules similar to the rules of section 401(a)(9) and the incidental benefit requirement of section 401(a) shall apply to the distribution of the entire interest of the owner of an IRA.
[12] Section 4974(a) of the Code imposes an excise tax upon the payee under any qualified retirement plan (including IRAs) if the amount distributed during the taxable year of the payee is less than the minimum required distribution for such taxable year.
[13] Sections 408(a)(4) of the Code provides that the interest of the owner of an individual retirement account or annuity is nonforfeitable.
[14] In this case, even though Taxpayer H has developed proposals for the disposition of his IRA assets after his death, his interest in that IRA remains nonforfeitable for as long as he lives, or until the IRA's assets have been exhausted. Thus, if H wants the IRA to retain its qualified status under section 408 of the Code, and if he wishes to avoid potential excise tax liability under section 4974, he must continue making withdrawals from his IRA under rules similar to those of section 401(a)(9)(A)(ii) of the Code and the incidental benefits rule of section 401(a), as required by section 408(a)(6). Such distributions will continue being subject to taxation under sections 408(d) and 72 of the Code.
[15] Accordingly, with regard to issue number 1, it is ruled that upon having executed the proposed beneficiary designation form, which names the QTIP Trust as beneficiary of any death proceeds of the IRA, H will continue to be able, during his lifetime, to make withdrawals from the IRA over the joint life expectancy of H and W, and the survivor of them, recalculated annually, as necessary to satisfy the minimum distributions requirements of section 401(a)(9) of the Code. Such distributions will be subject to tax under sections 408(d) and 72 of the Code, without being subject to excise tax under section 4974.
IV. RULING REQUEST NUMBER 2
[16] With regard to issue number 2, as previously noted, generally, a person other than an individual may not be a designated beneficiary for purposes of section 401(a)(9) of the Code. However, section 1.401(a)(9)-1, Q & A D-5 of the Proposed Income Tax Regulations provides that all beneficiaries of the trust with respect to the trust's interest in the employee's benefit are treated as having been designated as beneficiaries of the participant under the plan for purposes of determining the distribution period under section 401(a)(9)(A)(ii) if, as of the later of the date on which the trust is named as a beneficiary of the employee, or the employee's required beginning date, and as of all subsequent periods during which the trust is named as a beneficiary, the following requirements are met:
(1) the trust is a valid trust under state law, or would be but
for the fact that there is no corpus;
(2) the trust is irrevocable;
(3) the beneficiaries of the trust who are beneficiaries with
respect to the trust's interest in the employee's benefit are
identifiable from the trust instrument; and
(4) a copy of the trust instrument is provided to the plan.
[17] In this case, Taxpayer H has created and nominally funded the Irrevocable Trust under the laws of State N, and has represented that this trust is a valid trust under the laws of State N. Further, Taxpayer H has specifically identified Taxpayer W as the primary beneficiary of the Irrevocable Trust; the children would collect benefits only if both H and W were deceased. The trustee will deliver a copy of the Irrevocable Trust to the IRA custodian. If H dies before the assets of the Irrevocable Trust are completely distributed, the trustee will continue to make withdrawals from the trust amounting to the greater of trust earnings, or the amount required to satisfy the requirements of sections 408(a)(6) and 401(a)(9) of the Code. Therefore, it is concluded that Taxpayer H's Irrevocable Trust and designation of Taxpayer W as beneficiary satisfy the requirements of Q & A D-5 of section 1.401(a)(9)-1 of the proposed regulations.
[18] Accordingly, as to issue number 2, it is ruled that Tax- payer W, as the sole, primary beneficiary of the QTIP Trust, will continue to be deemed the death beneficiary of Taxpayer H's IRA.
V. ISSUE NUMBER 3
[19] With regard to issue number 3, section 401(a)(9)(A)(i) of the Code provides, in pertinent part, that if a participant in a qualified deferred compensation arrangement has begun receiving distributions as required under section 401(a)(9)(A)(ii), and if that participant dies before his or her entire interest in the arrangement has been distributed, then the remaining portion of such interest must be distributed to his or her beneficiary or beneficiaries at least as rapidly as under the method of distributions being used under section 401(a)(9)(A)(ii) as of the participant's date of death.
[20] In this case, Taxpayer H has attained his required beginning date as defined under section 401(a)(9)(C) of the Code and has been making required withdrawals pursuant to section 401(a)(9)(A)(ii). Moreover, the Irrevocable Trust specifically requires continued compliance with the requirements of section 401(a)(9)(B)(i) of the Code by requiring the trustee to continue making the IRA withdrawals and distributions after H's death, on a basis that is at least as rapid as the method of distributions being used as of the date his death. Accordingly, the estate plan embodied in the QTIP Trust and the IRA of Taxpayer H will continue to satisfy the minimum distribution requirements of section 401(a)(9).
[21] Accordingly, as to issue number 3, it is ruled that the terms of the QTIP Trust, requiring the trustee to make withdrawals from the IRA after the death of H at least as rapidly as under the method of distribution in effect on the date of H's death, will permit H's IRA and the trust to continue to meet the minimum distribution requirements of section 401(a)(9) of the Code.
VI. ISSUE NUMBER 4
[22] Section 2056(a) of the Code allows a marital deduction for the value of any interest in property that is included in the gross estate and that passes from the decedent to the decedent's surviving spouse. Section 2056(b)(1) disallows this deduction where, upon the occurrence of an event or contingency, or on the failure of an event or contingency to occur, an interest passing to the surviving spouse will terminate or fail.
[23] Section 2056(b)(7) of the Code provides an exception to this general rule for "qualified terminable interest property." This is property:
1. which passes from the decedent;
2. in which the surviving spouse has a qualifying income interest for life;
3. to which an election under section 2056(b)(7)(B)(v) has been made.
Section 2056(b)(7)(B)(ii) provides that the surviving spouse has a qualifying income interest for life if:
1. the surviving spouse is entitled to all of the income from the property payable annually or at more frequent intervals; and
2. no person has the power to appoint any part of the property to any person other than the surviving spouse.
[24] Section 20.2056(b)-7(b)(2)(i) of the Estate Tax Regulations provides that the election under section 2056(b)(7)(B)(v) may relate to all or any part of property that meets the requirements of section 2056(b)(7)(B)(i), provided that any partial election must be made with respect to a fractional or percentage share of the property so that the elective portion reflects its proportionate share of the increase or decrease in value of the entire property for purposes of applying section 2044 or 2519. The fraction or percentage may be defined by formula.
[25] Revenue Ruling 89-89, 1989-2 C.B. 231, discusses the circumstances under which a decedent's IRA will qualify as qualified terminable interest property where the IRA proceeds are payable in installments, not directly to the surviving spouse, but to a QTIP Trust that otherwise qualifies under section 2056(b)(7). The ruling concludes, inter alia, that the spouse will have a qualifying income interest for life in the IRA proceeds, where the IRA proceeds are distributed in installments to the QTIP Trust, provided: (a) the decedent irrevocably selects a distribution option that provides that the income earned by the undistributed IRA account balance will be paid currently to the QTIP Trust; and (b) under the terms of the QTIP Trust (or applicable state law) such IRA income distributed to the QTIP Trust is allocated to trust income and distributed to the surviving spouse. In Rev. Rul. 89-89, the executor made a QTIP election with respect to both the IRA and the QTIP Trust.
[26] Accordingly, in order for an interest to qualify as a qualifying income interest for life, the surviving spouse must be entitled to all of the income from the property at least annually. In the present case, H has provided that all income earned by the undistributed portion of the IRA must be paid currently to the QTIP Trust, and the Trust provides that all income must be distributed to W at least annually. Therefore, W has a qualifying income interest for life for purposes of section 2056(b)(7) of the Code.
[27] We conclude that, if the trustee of the QTIP Trust makes an election under section 2056(b)(7)(B)(v) of the Code to treat a portion of IRA and a portion of the QTIP Trust as qualified terminable interest property, that portion of the QTIP Trust and of the IRA will be eligible for a federal estate tax marital deduction under section 2056(b)(7). The effectiveness for purposes of sections 2044 and 2519 of charging distributions against the portion of the IRA and the Trust subject to the QTIP election will be determined under sections 20.2044-1(d)(3) and 25.2519-1(c)(3) of the regulations.
[28] Accordingly, as to issue number 4, it is ruled that if the executor/trustee of the QTIP Trust makes an election under section 2056(b)(7)(A)(v) of the Code to treat a portion of the IRA and a portion of the QTIP Trust as qualified terminable interest property, that portion of the QTIP Trust and the IRA will be eligible for a federal estate tax marital deduction under section 2056(b)(7).
[29] This letter is based on the assumption that Taxpayer H's Irrevocable Trust is a valid trust under the laws of State N. Further, this letter reaches no conclusions regarding the qualified status, under section 408 of the Code, of the IRA belonging to Taxpayer H.
[30] A copy of this letter has been sent to your authorized representative in accordance with a power of attorney on file in this office. Should you have any questions regarding this private letter ruling, please contact Employee Plans Technical Branch 1, CP:E:EP:T:1.
Sincerely,
John Swieca
Chief, Employee Plans
Technical Branch 1
Enclosures:
Deleted Copy of this Letter
Notice of Intention to Disclose, Notice 437
Copy of Notification Letter (Form 1155) to Authorized
Representative