Rev. Rul. 88-90

1988-2 C.B. 335, 1988-42 I.R.B. 5.

                       Internal Revenue Service

                                 Revenue Ruling

                     MARITAL DEDUCTION; CONTINGENT BEQUEST

                          Published: October 17, 1988

SECTION 2056. - BEQUESTS, ETC., TO SURVIVING SPOUSE, 26 CFR 20.2056(b)-1: Marital deduction; limitation in case of life estate or other "terminable interest"

  Marital deduction; contingent bequest. A bequest in trust for the benefit of a surviving spouse does not qualify for the marital deduction described in section 2056(a) of the Code if the bequest is contingent on whether the spouse survives until the trust is funded, which may occur more than 6 months after the decedent's death.

  An individual died testate in 1987, leaving the residue of the estate to the surviving spouse. The bequest provided that, should the surviving spouse not survive until the later of (a) 60 days after the date of the decedent's death or (b) the date on which the trust was funded, then the property that would otherwise fund the trust would pass to the decedent's children. The surviving spouse outlived the decedent by more than 60 days. The will was placed in probate immediately and, according to the will, the residue was placed in trust for the surviving spouse.

  The probate code of the state in which the decedent had lived provides that a will may be admitted to probate and application for letters testamentary can be made up to four years after a decedent's death. The state probate code also provides that the decedent's creditors may present their claims to the executor up to six months after letters testamentary are granted. Furthermore, the state code provides that property devised and bequeathed by will vests immediately in favor of the beneficiaries of the property. Finally, the state probate code provides that an asset subject to a testamentary trust becomes subject to the trust on the death of the testator, even though there is an intervening period of administration.

  ISSUE. At issue is whether a bequest in trust for the benefit of a surviving spouse qualifies for the marital deduction if the bequest is contingent on whether the spouse survives until the trust is funded?

  HOLDING. The Service has held that a decedent's bequest in trust for the benefit of a surviving spouse will not qualify for the marital deduction if the bequest is contingent on whether the spouse survives until the trust is funded, and due to the requirements of local probate law, the possibility exists at the time of the decedent's death that the funding of the trust may occur more than six months after the decedent's death.

  ANALYSIS. The Service set out the two primary relevant statutory rules. First, the Service noted the general requirement, in section 2056(b)(1) and regulation section 20.2056(b)-1, that no marital deduction is allowed if, on the lapse of time, on the occurrence of an event or contingency, or on the failure of an event or contingency to occur, the surviving spouse's interest will terminate or fail and the property will pass to another party. Second, the Service noted that section 2056(b)(3) provides an exception to the general rule where the interest is contingent upon the surviving spouse's not dying within six months of the decedent's death and the termination or failure of the interest does not in fact occur.

  Even though the applicable state probate law regards the surviving spouse's interest as having vested at the time of the decedent's death and entitles the spouse to income from the date of the decedent's death, the Service concluded that the trust's funding could still hang on when the will is admitted to probate, an event that could occur as much as four years after the decedent's death. 'Thus,' the Service found, 'at the time of [the decedent's] death, the funding of the marital trust is contingent upon [the decedent's] spouse surviving more than six months after the death of [the decedent].' The Service therefore found that the surviving spouse's interest in the trust is a terminable interest under section 2056(b)(1) and the bequest does not qualify for the marital deduction.

                                     ISSUE

  Does a bequest in trust for the benefit of a surviving spouse qualify for the marital deduction described in section 2056(a) of the Internal Revenue Code if the bequest is contingent on whether the spouse survives until the trust is funded?

                                     FACTS

  D, a resident of State X, died testate in 1987. D bequeathed the residue of the estate to a trust (described in section 2056(b)(5) of the Code) for the benefit of D's spouse. This bequest provided that, should D's spouse not survive until the later of 60 days after the date of D's death or the date on which the trust is funded, then the property that would otherwise fund the trust would pass to D's children. D's spouse survived D by more than 60 days; and pursuant to the terms of D's will, which was probated immediately after D's death, the residue of D's estate was placed in trust for the benefit of D's spouse.

  The probate code of State X contains the following provisions. No will shall be effectual for the purpose of proving title to, or the right to the possession of, any real or personal property disposed by a will until the will has been admitted to probate. A will may be admitted to probate and application for letters testamentary can be made up to 4 years after a decedent's death. Creditors of a decedent may present their claims to the executor up to 6 months after letters testamentary are granted. Property devised and bequeathed by a will vests immediately in favor of the beneficiaries of the property.

  State X's trust Code provides that an income beneficiary's right to income is determined by the date specified in the trust instrument or, if none is specified, the date the asset becomes subject to the trust. State X's trust code also provides that an asset subject to a testamentary trust becomes subject to the trust on the death of the testator, even though there is an intervening period of administration of the testator's estate, and when an interest in trust is terminated, the income beneficiary is entitled to distributable income accrued whether or not distributed to the trustee on the date of termination and income from periodic payments accrued but not due on the date of termination.

                                LAW AND ANALYSIS

  Section 2033 of the Code provides that the value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of the decedent's death.

  Section 2056(a) of the Code provides that the value of a decedent's taxable estate for federal estate tax purposes shall be determined by deducting from the value of the gross estate an amount equal to the value of any interest in property that passes or has passed from the decedent to the decedent's surviving spouse.

  Section 2056(b)(1) of the Code and section 20.2056(b)-1 of the Estate Tax Regulations provide the general rule that no deduction shall be allowed for an interest passing to the surviving spouse, if, on the lapse of time, on the occurrence of an event or contingency to occur, the surviving spouse's interest will terminate or fail and if

  (A) an interest in such property passes or has passed (for less than adequate and full consideration in money or money's worth) from the decedent to any person other than such surviving spouse (or the estate of such spouse); and

  (B) by reason of such passing such person (or his heirs or assigns) may possess or enjoy any part of such property after such termination or failure of the interest so passing to the surviving spouse.

  Section 2056(b)(3) of the Code provides that an interest passing to the surviving spouse shall not be considered an interest that will terminate or fail on the death of the spouse if

  (A) such death will cause a termination or failure of the surviving spouse's interest only if it occurs within a period not exceeding 6 months after the decedent's death, or only if the surviving spouse's death occurs as a result of a common disaster resulting in the death of the decedent and the surviving spouse, or only if the surviving spouse's death occurs in the case of either such event; and

  (B) the termination or failure of the interest does not in fact occur.

  Example 4 of section 20.2056(b)-3(d) of the regulations provides that a residuary estate devised and bequeathed to a surviving spouse is a nondeductible terminable interest where the spouse was required to be living on the date of distribution of the decedent's estate, even though the spouse survived until the date of distribution. See also Estate of Carl I. Hiem v. Commissioner, T.C.M. 1988-433 (1988).

  In this case D created by will an interest in trust for the benefit of D's surviving spouse on condition that the spouse survive until the later of 60 days after D's death or the date on which the trust is funded. If the spouse does not survive for the period specified in the will, the trust will fail and the assets will pass to D's children without passing through the surviving spouse's estate.

  Under State X's law a will can be admitted to probate up to 4 years after a decedent's death, application for letters testamentary can be made up to 4 years after a decedent's death, and creditors of a decedent may present their claims to the executor up to 6 months after letters testamentary are granted. Thus, at the time of D's death, the funding of the marital trust is contingent upon D's spouse surviving more than 6 months after the death of D.

  Because the surviving spouse's interest in the marital trust could fail or terminate upon the death of the spouse, the spouse's interest in the trust is a terminable interest under section 2056(b)(1) of the Code. This result occurs even though State X's law regards the spouse's interest as having vested at the time of the decedent's death and entitles the spouse to income from the date of the decedent's death. Neither is the result affected by the fact that the spouse survived the funding of the trust. The exception to section 2056(b)(1) described in section 2056(b)(3) is not applicable because at the time of D's death the termination or failure of the interest of the spouse in the marital trust could occur at a time later than 6 months after D's death.

                                    HOLDING

  A bequest in trust for the benefit of a decedent's surviving spouse does not qualify for the marital deduction under section 2056(a) of the Code if the bequest is contingent on whether the spouse survives until the trust is funded, and, due to the requirements of local probate law, the possibility exists at the time of the decedent's death that the funding of the trust may occur more than 6 months after the decedent's death.

                              DRAFTING INFORMATION

  The principal author of this revenue ruling is Gerald A. Consalvi of the Individual Tax Division. For further information regarding this revenue ruling contact George Masnik on (202) 566-3466 (not a toll-free call).

Rev. Rul. 88-90, 1988-2 C.B. 335, 1988-42 I.R.B. 5