rr-06-26.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part I

Section 2056.—Bequests, Etc., to Surviving Spouse

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

Rev. Rul. 2006-26

ISSUE

If a marital trust described in Situations 1, 2, or 3 is the named beneficiary of a
decedent’s individual retirement account (IRA) or other qualified retirement plan
described in section 4974(c) that is a defined contribution plan, under what
circumstances is the surviving spouse considered to have a qualifying income interest
for life in the IRA (or qualified retirement plan) and in the trust for purposes of an
election to treat both the IRA and the trust as qualified terminable interest property
(QTIP) under § 2056(b)(7) of the Internal Revenue Code?
FACTS

A dies in 2004, at age 68, survived by spouse, B. Prior to death, A established
an IRA described in § 408(a). A’s will creates a testamentary marital trust (Trust) that is
funded with assets in A’s probate estate. As of A’s death, Trust is irrevocable and is
valid under applicable local law. Prior to death, A named Trust as the beneficiary of all
amounts payable from the IRA after A’s death. The IRA is properly included in A’s
gross estate for federal estate tax purposes. The IRA is currently invested in productive

2
assets and B has the right (directly or through the trustee of Trust) to compel the
investment of the IRA in assets productive of a reasonable income. The IRA document
does not prohibit the withdrawal from the IRA of amounts in excess of the annual
required minimum distribution amount under § 408(a)(6). The executor of A’s estate
elects under § 2056(b)(7) to treat both the IRA and Trust as QTIP.
Under Trust’s terms, all income is payable annually to B for B’s life, and no
person has the power to appoint any part of the Trust principal to any person other than
B during B’s lifetime. B has the right to compel the trustee to invest the Trust principal
in assets productive of a reasonable income. On B’s death, the Trust principal is to be
distributed to A’s children, who are younger than B. Under the trust instrument, no
person other than B and A’s children has a beneficial interest in Trust (including any
contingent beneficial interest). Further, as in Rev. Rul. 2000-2, 2000-1 C.B. 305, under
Trust’s terms, B has the power, exercisable annually, to compel the trustee to withdraw
from the IRA an amount equal to all the income of the IRA for the year and to distribute
that income to B. If B exercises this power, the trustee is obligated under Trust’s terms
to withdraw the greater of all of the income of the IRA or the annual required minimum
distribution amount under § 408(a)(6), and distribute currently to B at least the income
of the IRA. The Trust instrument provides that any excess of the required minimum
distribution amount over the income of the IRA for that year is to be added to Trust’s
principal. If B does not exercise the power to compel a withdrawal from the IRA for a
particular year, the trustee must withdraw from the IRA only the required minimum
distribution amount under § 408(a)(6) for that year.

3
The trustee of Trust provides to the IRA trustee a copy of A’s will (Trust’s
governing instrument) before October 31, 2005, in accordance with A-6(b) of
§ 1.401(a)(9)-4 of the Income Tax regulations. Because the requirements of A-4 and A-
5 of § 1.401(a)(9)-4 of the Income Tax regulations are satisfied and there are no
beneficiaries or potential beneficiaries that are not individuals, the beneficiaries of the
trust may be treated as designated beneficiaries of the IRA. In accordance with
§ 408(a)(6) and the terms of the IRA instrument, the trustee of Trust elects to receive
annual required minimum distributions using the exception to the five year rule in
§ 401(a)(9)(B)(iii) for distributions over a distribution period equal to a designated
beneficiary’s life expectancy. Because amounts may be accumulated in Trust for the
benefit of A’s children, B is not treated as the sole beneficiary and, thus, the special rule
for a surviving spouse in § 401(a)(9)(B)(iv) is not applicable. Accordingly, the trustee of
Trust elects to have the annual required minimum distributions from the IRA to Trust
begin in 2005, the year immediately following the year of A’s death. The amount of the
annual required minimum distribution from the IRA for each year is calculated by
dividing the account balance of the IRA as of December 31 of the immediately
preceding year by the remaining distribution period. Because B’s life expectancy is the
shortest of all of the potential beneficiaries of Trust’s interest in the IRA (including
remainder beneficiaries), the distribution period for purposes of § 401(a)(9)(B)(iii) is B’s
life expectancy, based on the Single Life Table in A-1 of § 1.401(a)(9)-9, using B’s age
as of B’s birthday in 2005, reduced by one for each calendar year that elapses after
2005. On B’s death, the required minimum distributions with respect to any

4
undistributed balance of the IRA will continue to be calculated in the same manner and
be distributed to Trust over the remaining distribution period.
Situation 1—Authorized Adjustments Between Income and Principal. The facts
and the terms of Trust are as described above. Trust is governed by the laws of State
X. State X has adopted a version of the Uniform Principal and Income Act (UPIA)
including a provision similar to section 104(a) of the UPIA providing that, in certain
circumstances, the trustee is authorized to make adjustments between income and
principal to fulfill the trustee’s duty of impartiality between the income and remainder
beneficiaries. More specifically, State X has adopted a provision providing that
adjustments between income and principal may be made, as under section 104(a) of
the UPIA, when trust assets are invested under State X's prudent investor standard, the
amount to be distributed to a beneficiary is described by reference to the trust's income,
and the trust cannot be administered impartially after applying State X’s statutory rules
regarding the allocation of receipts and disbursements to income and principal. In
addition, State X’s statute incorporates a provision similar to section 409(c) of the UPIA
providing that, when a payment is made from an IRA to a trust: (i) if no part of the
payment is characterized as interest, a dividend, or an equivalent payment, and all or
part of the payment is required to be distributed currently to the beneficiary, the trustee
must allocate 10 percent of the required payment to income and the balance to
principal; and (ii) if no part of the payment made is required to be distributed from the
trust or if the payment received by the trust is the entire amount to which the trustee is
contractually entitled, the trustee must allocate the entire payment to principal. State
X’s statute further provides that, similar to section 409(d) of the UPIA, if in order to

5
obtain an estate tax marital deduction for a trust a trustee must allocate more of a
payment to income, the trustee is required to allocate to income the additional amount
necessary to obtain the marital deduction.
For each calendar year, the trustee determines the total return of the assets held
directly in Trust, exclusive of the IRA, and then determines the respective portion of the
total return that is to be allocated to principal and to income under State X’s version of
section 104(a) of the UPIA in a manner that fulfills the trustee’s duty of impartiality
between the income and remainder beneficiaries. The amount allocated to income is
distributed to B as income beneficiary of Trust, in accordance with the terms of the Trust
instrument. Similarly, for each calendar year the trustee of Trust determines the total
return of the assets held in the IRA and then determines the respective portion of the
total return that would be allocated to principal and to income under State X’s version of
section 104(a) of the UPIA in a manner that fulfills a fiduciary’s duty of impartiality. This
allocation is made without regard to, and independent of, the trustee’s determination
with respect to Trust income and principal. If B exercises the withdrawal power, Trustee
withdraws from the IRA the amount allocated to income (or the required minimum
distribution amount under § 408(a)(6), if greater), and distributes to B the amount
allocated to income of the IRA.
Situation 2—Unitrust Income Determination. The facts, and the terms of Trust,
are as described above. Trust is governed by the laws of State Y. Under State Y law, if
the trust instrument specifically provides or the interested parties consent, the income of
the trust means a unitrust amount of 4 percent of the fair market value of the trust
assets valued annually. In accordance with procedures prescribed by the State Y

6
statute, all interested parties authorize the trustee to administer Trust and to determine
withdrawals from the IRA in accordance with this provision. The trustee determines an
amount equal to 4 percent of the fair market value of the IRA assets and an amount
equal to 4 percent of the fair market value of Trust’s assets, exclusive of the IRA, as of
the appropriate valuation date. In accordance with the terms of Trust, trustee distributes
the amount equal to 4 percent of the Trust assets, exclusive of the IRA, to B, annually.
In addition, if B exercises the withdrawal power, Trustee withdraws from the IRA the
greater of the required minimum distribution amount under § 408(a)(6) or the amount
equal to 4 percent of the value of the IRA assets, and distributes to B at least the
amount equal to 4 percent of the value of the IRA assets.
Situation 3—“Traditional” Definition of Income. The facts, and the terms of Trust,
are as described above. Trust is governed by the laws of State Z. State Z has not
enacted the UPIA, and therefore does not have provisions comparable to
sections 104(a) and 409(c) and (d) of the UPIA. Thus, in determining the amount of IRA
income B can compel the trustee to withdraw from the IRA, the trustee applies the law
of State Z regarding the allocation of receipts and disbursements to income and
principal, with no power to allocate between income and principal. As in Situations 1
and 2, the income of Trust is determined without regard to the IRA, and the income of
the IRA is separately determined based on the assets of the IRA.
LAW AND ANALYSIS
Section 2056(a) provides that the value of the taxable estate is, except as limited
by § 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

7
surviving spouse, to the extent that interest is included in the value of decedent’s gross
estate.
Under § 2056(b)(1), if an interest passing to the surviving spouse will terminate
or fail, no deduction is allowed with respect to the interest if 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), that may be possessed or enjoyed by such other person
after termination of the spouse’s interest.
Section 2056(b)(7) provides that QTIP, for purposes of § 2056(a), is treated as
passing to the surviving spouse and no part of the property is 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 under § 2056(b)(7) applies. Under
§ 2056(b)(7)(B)(ii), the surviving spouse has a qualifying income interest for life if, inter
alia, the surviving spouse is entitled to all the income from the property, payable
annually or at more frequent intervals.
Section 20.2056(b)-7(d)(2) provides that the principles of § 20.2056(b)-5(f),
relating to whether the spouse is entitled for life to all of the income from the property,
apply in determining whether the surviving spouse is entitled for life to all of the income
from the property for purposes of § 2056(b)(7).
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 that the principles of

8
the law of trusts accord to a person who is unqualifiedly designated as the life
beneficiary of a trust. In addition, the surviving spouse is entitled for life to all of the
income from the property if the spouse is entitled to income as determined by applicable
local law that provides for a reasonable apportionment between the income and
remainder beneficiaries of the total return of the trust and that meets the requirements
of § 1.643(b)-1.
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 that it is virtually the
spouse’s. Thus, the surviving spouse will be entitled for life to all of the income from the
trust, payable annually, if, under the terms of the trust instrument, the spouse has the
right exercisable annually (or at more frequent intervals) to require distribution to the
spouse of the trust income and, to the extent that right is not exercised, the trust income
is to be accumulated and added to principal.
Generally, § 1.643(b)-1 provides that, for purposes of various provisions of the
Code relating to the income taxation of estates and trusts, the term “income” means the
amount of income of the estate or trust for the taxable year determined under the terms
of the governing instrument and applicable local law. Under § 1.643(b)-1, trust
provisions that depart fundamentally from traditional principles of income and principal
generally will not be recognized. Under these traditional principles, items such as
dividends, interest, and rents are generally allocated to income and proceeds from the
sale or exchange of trust assets are generally allocated to principal.

9
However, under § 1.643(b)-1, the allocation of an amount between income and
principal pursuant to applicable local law will be respected if local law provides for a
reasonable apportionment between the income and remainder beneficiaries of the total
return of the trust for the year, including ordinary and tax-exempt income, capital gains,
and appreciation. For example, a state statute providing that income is a unitrust
amount of no less than 3 percent and no more than 5 percent of the fair market value of
the trust assets, whether determined annually or averaged on a multiple year basis, is a
reasonable apportionment of the total return of the trust. Similarly, under § 1.643(b)-1,
a state statute that permits the trustee to make adjustments between income and
principal to fulfill the trustee’s duty of impartiality between the income and remainder
beneficiaries is generally a reasonable apportionment of the total return of the trust.
Rev. Rul. 2000-2, 2000-1 C.B. 305, concludes that a surviving spouse has a
qualifying income interest for life under § 2056(b)(7)(B)(ii) in an IRA and in a marital
trust named as the beneficiary of that IRA if the spouse has the power, exercisable
annually, to compel the trustee to withdraw the income earned on the IRA assets and to
distribute that income (along with the income earned on the trust assets other than the
IRA) to the spouse. Therefore, assuming all other requirements of § 2056(b)(7) are
satisfied, and provided the executor makes the election for both the IRA and the trust,
the IRA and the trust will qualify for the marital deduction under § 2056(b)(7). The
revenue ruling also concludes that the result would be the same if the terms of the trust
require the trustee to withdraw an amount equal to the income earned on the IRA
assets and to distribute that amount (along with the income earned on the trust assets
other than the IRA) to the spouse.

10
In Situation 1, under section 104(a) of the UPIA as enacted by State X, the
trustee of Trust allocates the total return of the assets held directly in Trust (i.e., assets
other than those held in the IRA) between income and principal in a manner that fulfills
the trustee’s duty of impartiality between the income and remainder beneficiaries. The
trustee of Trust makes a similar allocation with respect to the IRA. The allocation of the
total return of the IRA and the total return of Trust in this manner constitutes a
reasonable apportionment of the total return of the IRA and Trust between the income
and remainder beneficiaries under § 20.2056(b)-5(f)(1) and §1.643(b)-1. Under the
terms of Trust, the income of the IRA so determined is subject to B’s withdrawal power,
and the income of Trust, so determined, is payable to B annually. Accordingly, the IRA
and Trust meet the requirements of § 20.2056(b)(7)(B)(ii) and therefore B has a
qualifying income interest for life in both the IRA and Trust because B has the power to
unilaterally access all of the IRA income, and the income of Trust is payable to B
annually.
Depending upon the terms of Trust, the impact of State X’s version of sections 409(c)
and (d) of the UPIA may have to be considered. State X’s version of section 409(c) of the
UPIA provides in effect that a required minimum distribution from the IRA under Code section
408(a)(6) is to be allocated 10 percent to income and 90 percent to principal. This 10 percent
allocation to income, standing alone, does not satisfy the requirements of §§ 20.2056(b)-5(f)(1)
and 1.643(b)-1, because the amount of the required minimum distribution is not based on the
total return of the IRA (and therefore the amount allocated to income does not reflect a
reasonable apportionment of the total return between the income and remainder beneficiaries).
The 10 percent allocation to income also does not represent the income of the IRA under

11
applicable state law without regard to a power to adjust between principal and income. State
X’s version of section 409(d) of the UPIA, requiring an additional allocation to income if
necessary to qualify for the marital deduction, may not qualify the arrangement under § 2056.
Cf. Rev. Rul. 75-440, 1975-2 C.B. 372, using a savings clause to determine testator’s intent in
a situation where the will is ambiguous, but citing Rev. Rul. 65-144, 1965-1 C.B. 422, for the
position that savings clauses are ineffective to reform an instrument for federal transfer tax
purposes. Based on the facts in Situation 1, if B exercises the withdrawal power, the trustee is
obligated under Trust’s terms to withdraw the greater of all of the income of the IRA or the
annual required minimum distribution amount under § 408(a)(6), and to distribute at least the
income of the IRA to B. Thus, in this case, State X’s version of section 409(c) or (d) of UPIA
would only operate to determine the portion of the required minimum distribution amount that is
allocated to Trust income, and (because Trust income is determined without regard to the IRA
or distributions from the IRA) would not affect the determination of the amount distributable to
B. Accordingly, in Situation 1, the requirements of § 2056(b)(7)(B)(ii) are satisfied. However, if
the terms of a trust do not require the distribution to B of at least the income of the IRA in the
event that B exercises the right to direct the withdrawal from the IRA, then the requirements of
§ 2056(b)(7)(B)(ii) may not be satisfied unless the Trust’s terms provide that State X’s version
of section 409(c) of the UPIA is not to apply.
In Situation 2, the trustee determines the income of Trust (excluding the IRA) and the
income of the IRA under a statutory unitrust regime pursuant to which “income” is defined as a
unitrust amount of 4 percent of the fair market value of the assets determined annually. The
determination of what constitutes Trust income and the income of the IRA in this manner
satisfies the requirements of § 20.2056(b)-5(f)(1) and § 1.643(b)-1. The Trustee distributes

12
the income of Trust, determined in this manner, to B annually, and B has the power to compel
the trustee annually to withdraw and distribute to B the income of the IRA, determined in this
manner. Accordingly, in Situation 2, because B has the power to unilaterally access all income
of the IRA, and the income of Trust is payable to B annually, the IRA and Trust meet the
requirements of § 20.2056(b)(7)(B)(ii). The result would be the same if State Y had enacted
both the statutory unitrust regime and a version of section 104(a) of the UPIA and the income
of Trust is determined under section 104(a) of the UPIA as enacted by State Y, and the income
of the IRA is determined under the statutory unitrust regime (or vice versa). Under these
circumstances, Trust income and IRA income are each determined under state statutory
provisions applicable to Trust that satisfy the requirements of § 20.2056(b)-5(f)(1) and
§ 1.643(b)-1, and therefore B has a qualifying income interest for life in both the IRA and Trust.

In Situation 3, B has the power to compel the trustee to withdraw the income of
the IRA as determined under the law (whether common or statutory) of a jurisdiction
that has not enacted section 104(a) of UPIA. Under the terms of Trust, if B exercises
this power, the trustee must withdraw the greater of the required minimum distribution
amount or the income of the IRA, and at least the income of the IRA must be distributed
to B. Accordingly, in Situation 3, the IRA and Trust meet the requirements of
§ 2056(b)(7)(B)(ii), and therefore B has a qualifying income interest for life in both the
IRA and Trust, because B receives the income of Trust (excluding the IRA) at least
annually and B has the power to unilaterally access all of the IRA income determined in
accordance with § 20.2056(b)-5(f)(1). The result would be the same if State Z had

13
enacted section 104(a) of the UPIA, but the trustee decided to make no adjustments
pursuant to that provision.
In Situations 1, 2, and 3, the income of the IRA and the income of Trust
(excluding the IRA) are determined separately and without taking into account that the
IRA distribution is made to Trust. In order to avoid any duplication in determining the
total income to be paid to B, the portion of the IRA distribution to Trust that is allocated
to trust income is disregarded in determining the amount of trust income that must be
distributed to B under § 2056(b)(7).
The result in Situations 1, 2, and 3 would be the same if the terms of Trust
directed the trustee annually to withdraw all of the income from the IRA and to distribute
to B at least the income of the IRA (instead of granting B the power, exercisable
annually, to compel the trustee to do so). Furthermore, if, instead of Trust being the
named beneficiary of a decedent’s interest in the IRA, Trust is the named beneficiary of
a decedent’s interest in some other qualified retirement plan described in section
4974(c) that is a defined contribution plan, the same principles would apply regarding
whether B is considered to have a qualifying income interest for life in the qualified
retirement plan.
HOLDING
If a marital trust is the named beneficiary of a decedent’s IRA (or other qualified
retirement plan described in section 4974(c) that is a defined contribution plan), the
surviving spouse, under the circumstances described in Situations 1, 2, and 3 in this
revenue ruling, will be considered to have a qualifying income interest for life in the IRA
(or qualified retirement plan) and in the trust for purposes of an election to treat both the

14
IRA (or qualified retirement plan) and the trust as QTIP under § 2056(b)(7). If the
marital deduction is sought, the QTIP election must be made for both the IRA and the
trust.
Taxpayers should be aware, however, that in situations such as those described
in this revenue ruling in which a portion of any distribution from the IRA to Trust may be
held in Trust for future distribution rather than being distributed to B currently, B is not
the sole designated beneficiary of A’s IRA. As a result, both B and the remainder
beneficiaries must be taken into account as designated beneficiaries in order to
determine the shortest life expectancy and whether only individuals are designated
beneficiaries. See A-7(c) of § 1.401(a)(9)-5.
PROSPECTIVE APPLICATION
Under the authority provided by § 7805, the principles illustrated in Situations 1
and 2 of this revenue ruling will not be applied adversely to taxpayers for taxable years
beginning prior to May 30, 2006, in which the trust was administered pursuant to a state
statute described in §§ 1.643(b)-1, 20.2056(b)-5(f)(1), and 20.2056(b)-7(d)(1) granting
the trustee a power to adjust between income and principal or authorizing a unitrust
payment in satisfaction of the income interest of the surviving spouse.
EFECT ON OTHER REVENUE RULINGS
Rev. Rul. 2000-2, 2000-1 C.B. 305, is modified, and as modified, is superseded.
DRAFTING INFORMATION
The principal author of this revenue ruling is Mary Berman of the Office of the
Associate Chief Counsel (Passthroughs and Special Industries). For further information

15
regarding this revenue ruling, contact Mary Berman on (202) 622-3090 (not a toll-free
call).