SPOUSE'S LIFE ESTATE FAILS TO QUALIFY FOR QTIP TREATMENT OR FOR CHARITABLE DEDUCTION FOR THE REMAINDER INTEREST.

Reference:

Section 2055 -- Estate Tax Charitable Deduction
UIL Number(s) 2055.12-01, 2056.01-01

Full Text:

Date: January 30, 1987

Control No.: TR-32-30252-86

Taxpayer's Name: * * *
Taxpayer's Address: * * *
Taxpayer's ID No.: * * *
Years Involved: * * *
No Conference Held.

ISSUES

1. Does the wording of the will preclude QTIP treatment under section 2056(b)(7) of the Internal Revenue Code because the surviving spouse's right to enjoyment of the residence may terminate if she does not use the residence at least one month in each calendar year?

2. Is the estate entitled to a charitable deduction for the remainder interest and a regular, non-QTIP, marital deduction, although the property is not left in a qualified charitable remainder trust?

FACTS

The decedent died testate on the above-captioned date. Paragraph 7.(B) of the will provides for the transfer of decedent's residence to a trust established thereunder:

(B) I give to my trustee that certain residence located at . . . [address Provided] . . . to be held for the following purposes:

My wife is granted a life estate in and to said property. Said life estate shall continue so long as my wife maintains said residence as her home for at least one (1) month in each calendar year and shall be responsible for all taxes, insurance, and maintenance required on said premises.

Upon the termination of said life estate, either by death of my wife, or if she voluntarily vacates the use of said premises as provided, said real property shall be sold and the net proceeds distributed in equal shares to the following non- profit entities: . . . [three organizations named] . . . .

APPLICABLE LAW AND RATIONALE

ISSUE 1

Section 2056(b)(7)(A) of the Code provides for the allowance of a marital deduction in the case of qualified terminable interest property. Section 2056(b)(7)(B) defines the term "qualified terminable interest property" ("QTIP") as property which passes from the decedent, in which the surviving spouse has a qualifying income interest for life, and to which an election applies. The surviving spouse has a qualifying income interest for life if the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, and no person has a power to appoint any part of the property to any person other than the surviving spouse.

Under section 2056(b)(7)(B) of the Code, an income interest granted 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.

In the present case, Article 7.(B) of the will provides that the spouse's life estate in the residence shall continue only so long as the spouse maintains her residence in the premises for at least one month in each calendar year. Since the spouse's interest in the residence is subject to termination upon the occurrence of a specified event (i.e., failure to use the premises as her residence), the interest is not a qualifying income interest for life within the meaning of section 2056(b)(7)(B) of the Code. Accordingly, QTIP treatment is not allowable for the spouse's interest in the residence.

ISSUE 2

Section 2055(e)(2)(A) of the Code provides that no estate tax charitable deduction shall be allowed where an interest in property (other than a remainder interest in a personal residence or other interest described in section 170(f)(3)(B) of the Code) has passed from the decedent for a charitable purpose and an interest in the same property has passed for less than adequate and full consideration in money or money's worth from the decedent for a noncharitable purpose unless, in the case of a remainder interest, such interest is in a trust which is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664) or a pooled income fund (described in section 642(c)(5)).

Section 20.2055-2(e)(2)(ii) of the Estate Tax Regulations provides that an estate tax charitable deduction is allowable if the charitable interest is a remainder interest, not in trust, in a personal residence. Thus, for example, if the decedent devises to charity a remainder interest in a personal residence and bequeaths to his surviving spouse a life estate in such property, the value of the remainder interest is deductible under section 2055.

Rev. Rul. 76-357, 1976-2 C.B. 285, concludes that no charitable deduction is allowable under section 2055 of the Code for a remainder interest in a decedent's personal residence passing to charity upon the death of the decedent's child, for whom the residence was held in a testamentary trust, that is neither a charitable remainder annuity trust or unitrust nor a pooled income fund. The conclusion reached in Rev. Rul. 76-357 is based, as stated therein, on the intent of Congress that where a remainder interest in a personal residence or farm is given to charity, such gift must either be made outright (i.e., free of trust) or in a trust which conforms to the requirements of sections 664 and 2055 of the Code. See S. Rept. No. 91-552, 9lst Cong., 1st Sess. (1969), 1969-3 C.B. 423, 479-480, and Estate of Cassidy v. Commissioner, T.C.M. 1985-37.

Section 2056(b)(1) of the Code provides the general rule that no marital deduction shall be allowed in the case of a life estate or other terminable interest. Relevant exceptions to this general rule are provided in section 2056(b)(7) with respect to QTlP property (see above) and in section 2056(b)(8) with respect to qualified charitable remainder trusts.

Section 2056(b)(8) of the Code provides that if the surviving spouse of a decedent is the only noncharitable beneficiary of a charitable remainder annuity trust or a charitable remainder unitrust described in section 664 (qualified charitable remainder trust), section 2056(b)(1) shall not apply to any interest in such trust which is transferred to the surviving spouse. Thus, under section 2056(b)(8), in such case the estate will receive a charitable deduction under section 2055 for the value of the remainder interest and a marital deduction under section 2056(b)(8) for the value of the annuity or unitrust interest. A marital deduction for the value of the surviving spouse's annuity or unitrust interest in a qualified charitable remainder trust is allowable only under section 2056(b)(8).

In the present case, the residence is held in trust which is not a qualified charitable remainder trust. Therefore, no charitable deduction is allowable for the remainder interest in the residence. See above references to section 20.2055-2(e)(2)(ii) of the regulations, Rev. Rul. 76-357, and section 2056(b)(8) of the Code. Since the residence is not held in a qualified charitable remainder trust, the regular, non-QTIP, marital deduction is also unavailable for the surviving spouse's terminable interest in the residence. See above references to sections 2056(b)(1) and 2056(b)(8) of the Code.

CONCLUSIONS

1. The surviving spouse's interest does not qualify for QTIP treatment under section 2056(b)(7) of the Code.

2. The estate is not entitled to a charitable deduction for the remainder interest and a regular, non-QTIP, marital deduction under sections 2055 and 2056 of the Code.

A copy of this technical advice memorandum is to be given to the taxpayer. 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 memorandum have not yet been adopted. Therefore, this memorandum will be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in the memorandum. See section 11.03 of Rev. Proc. 87-2, 1987-1 I.R.B. 19. However, a technical advice memorandum involving a continuing transaction generally is not revoked or modified retroactively if the taxpayer can demonstrate that the criteria in section 11.04 of Rev. Proc. 87-2 are satisfied.