REVENUE RULE 90-3

1990-1 C.B. 174, 1990-4 I.R.B. 13.

Internal Revenue Service
Revenue Ruling

RESIDUARY BEQUEST TO SPOUSE; PECUNIARY BEQUEST PAYABLE AT FAIR MARKET VALUE

Published: January 22, 1990

Section 2056. - Bequests, Etc., To Surviving Spouse, 25 CFR 20.2056(b)-1: Marital deduction; limitation in case of life estate or other 'terminable interests.'
Residuary bequest to spouse; pecuniary bequest payable at fair market value. A residuary bequest to the surviving spouse is deductible for purposes of section 2056 of the Code where the beneficiary of a pecuniary bequest is required to be paid with assets valued at their fair market at the time of payment. Rev. Rul. 81-20 clarified.

ISSUE

If a decedent's will provides for a pecuniary bequest that is required to be paid on the basis of fair market value of assets at the time of payment, does the possibility that post death fluctuations in the value of estate assets may significantly diminish the residuary bequest to the surviving spouse cause the residuary bequest to be a nondeductible terminable interest for purposes of section 2056(b) of the Internal Revenue Code?

FACTS

D, a resident of State X died on March 1, 1987. At the time of D's death, D's gross estate had a fair market value of $900,000. Debts of the decedent and expenses of administering the estate totaled $50,000. D's will provides for a bequest in the amount of $600,000 to D's child, C, and gives the residue of D's estate to D's surviving spouse, S. The will empowers the executor to satisfy the $600,000 pecuniary bequest in cash or in kind or by a combination of both. The executor is required under applicable local law to value assets selected to satisfy the bequest at their fair market value as of the date of distribution.

During October 1987, the value of the assets comprising D's gross estate abruptly declined from approximately $900,000 to $700,000 and remained in the range of $680,000 to $710,000 until the estate was finally settled and its assets distributed on January 18, 1989. After paying the debts and administration expenses and distributing cash and other property worth $600,000 in payment of the bequest to C, the executor distributed the residue of the estate to S. The value of the distribution to S was $55,000 rather than the $250,000 value of the residue at the time of D's death.

LAW AND ANALYSIS

Section 2056(a) of the Code provides that, for purposes of the tax imposed by section 2001, the value of the taxable estate shall, except as limited by section 2056(b), 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) of the Code places a limitation on the allowability of the marital deduction in the case of a life estate or other terminable interest.

Section 20.2056(b)-1(b) of the Estate Tax Regulations provides that a 'terminable interest' in property is an interest that will terminate or fail upon the lapse of time or upon the occurrence or the failure to occur of some contingency. Life estates, terms for years, annuities, patents, and copyrights are terminable interests. However, a bond, note, or similar contractual obligation, the discharge of which would not have the effect of an annuity or a term for years, is not a terminable interest.

Section 20.2056(e)-1 of the regulations generally provide that any property interest bequeathed or devised by the decedent or inherited from the decedent is considered as having passed to the person to whom the decedent bequeathed or devised the interest or to the person who inherited the interest from the decedent.

In cases where a pecuniary bequest may be paid or satisfied with noncash assets on the basis of the fair market value of such assets as determined at a time prior to payment, the value of the payment may differ from the amount of the bequest. For example, if noncash assets used to pay such a bequest have declined in value between the valuation date and the payment date, the fair market value of the payment would be less than the amount of the pecuniary bequest. See Rev. Proc. 64-19, 1964-1 C.B. 682, which explains that a marital deduction may be disallowed if a pecuniary bequest is to be satisfied with noncash assets on the basis of date of death values of such assets and the executor is under no clear duty to satisfy such bequest with assets that are fairly representative of the appreciation and depreciation of assets available to pay the bequest. Rev. Proc. 64-19 also explains that a marital deduction is ordinarily allowable if a pecuniary bequest to the surviving spouse is to be paid with assets valued on the date of payment.

In the present case, the residuary bequest is considered as having passed from D to the surviving spouse within the meaning of section 20.2056(e) of the regulations. The fact that estate assets decline in value before the property is distributed does not affect this conclusion. Further, the residuary bequest is not a 'terminable interest' as defined in section 20.2056(b)-1(b).

HOLDING

If a pecuniary bequest is required to be paid with assets valued at the time of payment, the possibility that post death fluctuations in the fair market value of estate assets may diminish the residuary bequest to the surviving spouse does not cause the residuary bequest to be a nondeductible terminable interest for purposes of section 2056(b) of the Code.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 81-20, 1981-1 C.B. 471, concludes that a deduction is allowable under section 2055 of the Code for a residuary bequest to a charity where there was a pecuniary bequest to a child. In reaching this conclusion, Rev. Rul. 81- 20 relies, in part, on the executor's obligation under applicable state law to act impartially and fairly with respect to all beneficiaries. Generally, this duty of impartiality and fairness is satisfied if a pecuniary bequest is required to be paid with noncash assets on the basis of the fair market value of such assets on the date of payment, provided that distribution of the assets is not unreasonably postponed. Rev. Rul. 81-20 is clarified.

DRAFTING INFORMATION

The principal author of this revenue ruling is Lane Damazo of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this ruling, contact Mr. Damazo on (202) 535-6766 (not a toll-free call).

Rev. Rul. 90-3, 1990-1 C.B. 174, 1990-4 I.R.B. 13.